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Full text of "Comparison of tax reform provisions of H. R. 3838 : as passed by the House and the Senate"

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Same as House bill for State and local 
income, real property, and personal proper- 
ty taxes. 

Sales ^ajces.— State and local general sales 
taxes are deductible to the extent of 60 
percent of the excess of such taxes over 
State and local income taxes paid or accrued 
by the taxpayer during the year (floor 
amendment by Senator Evans, adopted by 
voice vote). 

Resolution.— It is the sense of the Senate 
that the bill adopted in conference retain 
present law regarding deductions for State 
and local taxes (floor amendment by Sens. 
Chiles and Domenici, adopted by a vote of 
76-21). 

Capitalization ru/e.— State, local, and for- 
eign taxes for which an itemized deduction 
is not allowed but which are allocable to a 
purchase of property are added to the basis 
of such property. 

Effective date.— Taxable years beginning 
on or after January 1, 1987. 


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The nonitemizer charitable deduction is 
made permanent. Also, the bill modifies the 
deduction by providing that, for taxable 
years beginning after 1985, the deduction is 
subject to a $100 floor. 


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Itemized deductions for State and local 
taxes would be repealed. 

State and local taxes other than income 
taxes would be deductible if incurred in a 
business or, subject to the limitation in the 
following sentence, in an investment activi- 
ty. When incurred by an individual in an 
investment activity, these taxes would be 
among the category of expenditures that 
would be deductible "above-the-line" to the 
extent exceeding one percent of adjusted 
gross income (see item E, below). 

Effective date.— Taxable years beginning 
after 1985. 


The nonitemizer charitable deduction 
would be repealed for contributions made 
after 1985, i.e., one year earlier than the 
scheduled termination of the nonitemizer 
deduction under present law. 


cB 

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Individuals may claim itemized deduc- 
tions with respect to the following State and 
local taxes: income taxes, real property 
taxes, personal property taxes, and sales 
taxes. Other State and local taxes and for- 
eign taxes are deductible by individuals if 
incurred in a business or in an income- 
producing (investment) activity, including 
such taxes that are allocable to a purchase 
of property and thus otherwise would have 
to be capitalized. 


Nonitemizers may deduct their charitable 
contributions in addition to taking the 
standard deduction (ZBA), subject to limita- 
tions for pre-1986 years. 

The maximum nonitemizer deduction was 
$25 for 1982 and 1983, and $75 for 1984. For 

1985, 50 percent of the amount contributed 
was deductible, without a dollar cap. For 

1986, the full amount of contributions is 
deductible. 

Under present law, no deduction (beyond 
the standard deduction) is provided for 
charitable contributions by nonitemizers 
made after 1986. 


E 


D. Deductions for Personal Expendi- 
tures 
1. Itemized deductions for cer- 
tain State and local taxes (sec. 
135 of the Senate amendment) 


2. Charitable deduction for non- 
itemizers (sec. 133 of the 
House bill) 



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The floor under the itemized medical ex- 
pense deduction is increased from 5 to ap- 
proximately 9 percent (substituted for 10- 
percent floor of committee amendment by 
floor amendment by Sen. Metzenbaum, 
adopted by vote of 80-18). 

Effective date.— Taxable years beginning 
on or after January 1, 1987. 


3 
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(a) The itemized adoption expense deduc- 
tion is repealed. 

ib) The adoption assistance program in 
Title IV-E of the Social Security Act is 
amended to provide matching funds as an 
administrative expense for adoption ex- 
penses for any child with special needs who 
has been placed for adoption in accordance 
with applicable State and local law. Such 
expenses include all qualified adoption ex- 
penses included in the current tax deduc- 
tion provision. 

Effective date.— The deduction repeal 
generally is effective for adoption expenses 
paid after 1986; present law continues to 
apply in 1987 for adoptions as to which 
deductible expenses were incurred in 1986. 
The effective date of amending the adoption 
assistance program is coordinated with re- 
peal of the deduction. 


The bill provides a permanent rule (effec- 
tive retroactively) that ministers receiving 
tax-free parsonage allowances, as well as 
military personnel receiving tax-free mili- 
tary housing allowances, are not precluded 
by Code section 265 from deducting mort- 
gage interest or real property taxes on the 
taxpayer's residence. 


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would be repealed in anticipation that a 
direct expenditure program would be en- 
acted to continue Federal support for fami- 
lies adopting children with special needs. 

Effective date.— Generally January 1, 
1987, except that present law would apply 
for pre-1986 adoptions and special phaseout 
rules would apply for adoptions during 1986. 


3 

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Itemizers may deduct unreimbursed med- 
ical care expenses to the extent the total of 
such expenses exceeds five percent of the 
taxpayer's AGI. 


An itemized deduction is allowed for up to 
$1,500 of adoption fees and expenses (such 
as court costs and attorneys' fees) for the 
adoption of a child with special needs, i.e., a 
handicapped or other child eligible for adop- 
tion assistance payments under the Social 
Security Act. 


The IRS has ruled that a minister may 
not deduct mortgage interest and property 
taxes allocable to a tax-free parsonage al- 
lowance. This ruling was based on Code 
section 265(1), which disallows deductions 
for expenses allocable to tax-exempt in- 
come. This ruling applied effective July 1, 
1983, subject to transitional relief (extended 
through 1986) for ministers owning homes 
before 1983. 


E 

01 


1 — 

3. Medical expense deduction 
(sec. 134 of the Senate amend- 
ment) 


t»S 

ii 

■§■§ 


5. Deductibility of mortgage in- 
terest and taxes allocable to 
tax-free allowances for minis- 
ters and military personnel 
(sec. 144 of the House bill and 
sec. 144 of the Senate amend- 
ment) 






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(a)(i)(A) Same as House bill. 

(B) The recovery period for automobiles, 
light trucks, and over-the-road tractor units 

is 5-years. 

(ii) Generally, property to the extent it is 
financed with bonds, the interest on which 
is tax-exempt, is depreciated using the same 
method as in (i). "The recovery period for 
solid waste disposal facilities and hazardous 
waste treatment facilities is 8 years, and for 
low-income housing is 27.5 years. 

(iii) Taxpayers may elect either the alter- 
native cost recovery system or the straight- 
line method over the ACRS recovery period 
for property that is otherwise eligible for 
ACRS on a class-by-class, year-by-year basis. 

(b) Same as House bill. 

(c) Same as House bill. 


c 

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(a)(i)(A) An alternative cost recovery sys- 
tem is provided for the following pur- 
poses: (1) property used predominantly 
outside the United States, (2) property 
leased to a tax-exempt entity, (3) for com- 
puting earnings and profits of a domestic 
corporation, and (4) for applying the mini- 
mum tax provisions. 

Depreciation deductions are computed 
under the method that is used under 
present law for property that is leased to a 
tax-exempt entity, which is generally 
straight-line over the ADR midpoint life. 
The cost of qualified technological equip- 
ment is recovered over 5 years and real 
property over 40 years. 

(B) Property which is classified for the 
incentive system on a basis other than ADR 
midpoint is treated as having the same re- 
covery period as for the incentive system 
(e.g., automobiles and computer-based cen- 
tral office switching equipment are recov- 
ered over 5 years). 

(ii) If all or part of property, other than 
low-income housing, is financed with bonds, 
the interest on which is tax-exempt, it is 
depreciated using the straight-line method 
over the next longest IDS class (40 years for 
real property). 

(iii) Taxpayers may elect the alternative 
cost recovery system described in (i) for 
property that is otherwise eligible for incen- 
tive depreciation on a class-by-class, year- 
by-year basis. 

(b) Provides Presidential authority to 
deny accelerated depreciation to property 
produced abroad, similar to present-law 
rules applicable to the investment tax 
credit. 

(c) Property launched by a U.S. person 
from the United States and used in outer 
space is not treated as foreign use property. 


Beginning in 1988, IDS deductions are 
increased for half the annual inflation in 
excess of 5 percent since the second year an 
asset is placed in service. 




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(a) A system intended to allow deprecia- 
tion deductions that approximate the as- 
sumed decline in an asset's value would 
apply for certain purposes. Although no spe- 
cific system is recommended, the Adminis- 
tration proposal indicates that the 
depreciation system set forth in the 1984 
Treasury report ("RCRS") would serve as 
the model. Under RCRS, the inflation-ad- 
justed basis of property would be recovered 
over periods ranging from 5 years for short- 
lived property to 63 years for real property. 

(b) No provision. 

(c) No provision. 


Beginning with the second year an asset 
is in service, the asset's unrecovered basis 
would be adjusted upwards for inflation. 




c 

01 
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a. 


(a)(i) ACRS deductions are reduced for 
property that is (1) used predominantly out- 
side the United States or (2) leased to a tax- 
exempt entity. 

Different depreciation methods are also 
used for purposes of (1) computing earnings 
and profits of a domestic corporation, and 
(2) applying the minimum tax provisions. 

(ii) Property, other than low-income hous- 
ing, to the extent it is financed with indus- 
trial development bonds, the interest on 
which is tax-exempt, is depreciated using 
the straight-line method over the ACRS re- 
covery period. 

(iii) Taxpayers can elect to use the 
straight-line method over the applicable 
ACRS recovery period (or over a longer 
recovery period) with respect to one or more 
classes of ACRS property placed in service 
during a taxable year. 

(b) There is Presidential authority to deny 
the investment tax credit, but not acceler- 
ated depreciation. 

(c) No provision. 


The basis of depreciable property is not 
adjusted for inflation; however, deprecia- 
tion allowances are accelerated, in part, to 
compensate for inflation. 






; 

2. Alternative cost recovery sys- 
tem 

0. In general 

b. Property predominantly of 
foreign origin 

c. Property used in outer 
space 


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Same as House bill. The statutory rules 
for determining the term of a lease — the 
only future relevance of which would be in 
determining the amortization period for 
lease acquisition costs — is amended to pro- 
vide that the term of a lease is determined 
by including all renewal options as well as 
any period for which the parties reasonably 
expect the lease to be renewed. 


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to 

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to 

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Provides a $10,000 ceiling for expensing to 
taxpayers whose total investment in tangi- 
ble personal property is $200,000 or less. For 
other taxpayers, for every dollar of invest- 
ment in excess of $200,000, the $10,000 ceil- 
ing is reduced by one dollar. The amount 
eligible to be expensed is limited to the 
taxable income derived from the active 
trade or business in which the property is 
used. The difference between expensing and 
ACRS deductions is recaptured if property 
is converted to nonbusiness use at any time 
before the end of the property's recovery 
period. 


3 

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to 
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Provides a $10,000 ceiling and limits eligi- 
bility for expensing to taxpayer whose total 
investment in tangible personal property 
for taxable year is $200,000 or less. 


With repeal of the investment tax credit, 
the definition of eligible property is expand- 
ed to include all property. 


CO 

O 

a 
o 

£ 

c 
a. 


The cost of leasehold improvements made 
by a lessee would be recovered under the 
general rules, without regard to the lease 
term, except where the improvement is rea- 
sonably expected to have no residu&l value 
on expiration of the lease. 


Each asset class would be assigned a safe- 
harbor repair allowance factor. A taxpayer 
would automatically deduct expenses to the 
extent the expenses do not exceed the prod- 
uct of the asset's inflation-adjusted basis 
multiplied by the repair allowance factor. 


1 

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A lessee recovers the cost of leasehold 
improvements over the shorter of the prop- 
erty's ACRS recovery period or the portion 
of the lease term remaining on the date the 
property is acquired. Under statutory rules 
provided for use in determining the term of 
a lease, in certain cases, a lease term in- 
cludes periods during which the lease may 
be renewed pursuant to an option held by 
the lessee, unless the lessee establishes that 
it is more probable than not that the lease 
will not be renewed. In other cases, the 
statute provides that a lease term is deter- 
mined by excluding renewal options held by 
the lessee, unless the facts show with rea- 
sonable certainty that the lease will be re- 
newed. These rules also apply in 
determining the amortization period for 
lease acquisition costs. 


Expenditures that prolong the life of an 
asset are recoverable in the same manner as 
the cost of a capital asset. Other expendi- 
tures for repair or maintenance are ex- 
pensed. The characterization of an expense 
as a capital expenditure or a deductible 
repair requires a factual determination. 


Taxpayers can elect to expense up to 
$5,000 of the cost of personal property that 
is purchased and used in a trade or busi- 
ness. The $5,000 ceiling is scheduled to in- 
crease to $7,500 for taxable years beginning 
in 1988 and 1989, and to $10,000 for years 
beginning after 1989. The dollar limitation 
is subject to apportionment among certain 
related entities. If expensed property is con- 
verted to nonbusiness use within two years 
of the time the property was placed in serv- 
ice, the difference between the amount ex- 
pensed and the ACRS deductions that would 
have been allowed for the period of business 
use is recaptured as ordinary income. 


Taxpayers generally compute deprecia- 
tion deductions on an asset-by-asset basis. 
There is an election to establish mass asset 
vintage accounts for assets in the same re- 
covery class and placed in service in the 
same year. The definition of assets eligible 
for inclusion in mass asset accounts is limit- 
ed, primarily because of concern about the 
mechanics of recapturing investment tax 
credit. 


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(n 


(a) Effective for property placed in service 
on or after January 1, 1987. 

(b) Under rules similar to those enacted 
as part of ACRS, taxpayers are prevented 
from bringing property placed in service 
before the effective date under the revised 
ACRS by certain post-effective date transac- 
tions among related parties. 

(c) Present law ACRS would apply to prop- 
erty with an ADR midpoint of 7 years or 
greater (other than computer-based tele- 
phone central office switching equipment) 
that is: 

(1) constructed, reconstructed, or ac- 
quired pursuant to a written contract 
that was binding as of March 1, 1986, or 

(2) constructed or reconstructed by 
the taxpayer, if the lesser of $1 million 
or 5 percent of cost has been incurred or 
committed by March 1, 1986, if con- 
struction commenced by that date, or 

(3) an equipped building or a plant 
facility, if construction has commenced 
as of March 1, 1986, pursuant to a writ- 
ten specific plan, and more than half of 
the cost has been incurred or commit- 
ted by that date, and 

if such property or project is placed in 
service by January 1, 1989 in the case of 
property with an ADR midpoint less than 20 
years; and by January 1, 1991 in the case of 
property with an ADR midpoint of 20 years 
and greater and residential rental and non- 
residential real property. 

Present law ACRS would apply to proper- 
ty that qualifies under (1), (2), or (3) which is 
sold and leased back by the person initially 
committed to acquire the property within a 
3-month window. 

Special transitional rules are provided. 


QQ 

01 

3 
O 


Same as present law; also, special normal- 
ization rules are applied to excess deferred 
tax reserves resulting from the reduction of 
corporate income tax rates. 


(a) Effective for property placed in service 
on or after January 1, 1986. 

(b) No provision. 

(c) ACRS would apply to: 

(1) property that is constructed, re- 
constructed, or acquired pursuant to a 
written contract that was binding as of 
September 25, 1985, or 

(2) property constructed or recon- 
structed by the taxpayer, if the lesser of 
$1 million or 5 percent of cost has been 
incurred or committed by September 
25, 1985, if construction commenced by 
that date, or 

(3) an equipped building or a plant 
facility, if construction has commenced 
as of September 25, 1985, pursuant to a 
written specific plan, and more than 
half of the cost has been incurred or 
committed by that date, and 

if property or project is placed in service by 
July 1, 1986, in the case of Class 1 property, 
cars, and light general purpose trucks; by 
January 1, 1987, in the case of Class 2 
property; by January 1, 1989, in the case of 
Class 3-6 property; and by January 1, 1991, 
in the case of Class 7-10 property. 

ACRS would apply to property that quali- 
fies under (1), (2), or (3) which is sold and 
leased back by the person initially commit- 
ted to acquire the property within a 3- 
month window. 

Special transitional rules are provided. 


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(a) CCRS would be effective for property 
placed in service on or after January 1, 
1986. 

(b) Under rules similar to those enacted 
as part of ACRS, taxpayers would be pre- 
vented from bringing property placed in 
service before the effective date under 
CCRS by certain post-effective date transac- 
tions among related parties. 

(c) No provision. 


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tion 

a. In general 

b. Anti-churning rules 

c. Transition rules 



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Same as President's proposal and House 
bill. 

Effective date. — Expenditures paid or in- 
curred after December 31, 1986. 

Transition rate. — Present law applies to 
expenditures incurred: 

(i) pursuant to a written contract that 
was binding as of March 1, 1986; or 

(ii) with respect to development, pro- 
tection, expansion, registration or de- 
fense commenced as of March 1, 1986, if 
the lesser of $1 million or 5 percent of 
cost has been incurred or committed by 
the date, 
provided in each case the trademark or 
tradename is placed in service before Janu- 
ary 1, 1988. 


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Same as President's proposal. 

Effective date— Expenditures paid or in- 
curred on or after January 1, 1986. 

Transition rule.— Present law applies to 
expenditures incurred: 

(i) pursuant to a written contract that 
was binding as of September 25, 1985; 
or 

(ii) with respect to development, pro- 
tection, expansion, registration or de- 
fense commenced as of September 25, 
1985, if the lesser of $1 million or 5 
percent of cost has been incurred or 
committed by that date; 
provided in each case the trademark or 
trade name is placed in service before Janu- 
ary 1, 1988. 


Same as President's proposal. 

Effective date. — Expenditures paid or in- 
curred on or after January 1, 1986. 

Transition rule. — Present law applies to 
expenditures incurred: 

(i) pursuant to a written contract that 
was binding as of September 25, 1985; 
or 

(ii) with respect to facilities, construc- 
tion of which is commenced as of Sep- 
tember 25, 1985, if the lesser of $1 
million or 5 percent of cost has been 
incurred or committed by that date; 
provided in each case the facility is placed 
in service before January 1, 1988. 




"S 

o 
ft 
o 

u 

a. 
c 

2 


The election would be repealed. Trade- 
mark and trade name expenditures would 
therefore generally be capitalized and re- 
covered on a disposition of the asset. 

Effective date. — The repeal would be ef- 
fective for expenditures paid or incurred on 
or after January 1, 1986. 


The election would be repealed. Expendi- 
tures for pollution control facilities would 
therefore be recovered in accordance with 
the applicable depreciation schedules. 

Effective date.— The repeal would be ef- 
fective for expenditures paid or incurred on 
or after January 1, 1986. 




c 

a> 
0. 


Taxpayers may elect to amortize over a 
period of at least 60 months expenditures 
for the acquisition, protection, expansion, 
registration, or defense of a trademark or 
trade name, other than an expenditure 
which is part of the consideration for an 
existing trademark or trade name. 


Taxpayers may elect to amortize over a 
60-month period the cost of a qualifying 
certified pollution control facility used in 
connection with a plant that was in oper- 
ation before 1976. To the extent that a 
pollution control facility has a useful life in 
excess of 15 years, a portion of the facility's 
cost is not eligible for 60-month amortiza- 
tion, but must be recovered through depre- 
ciation. 




E 


D. Rapid Amortization Provisions 

1. Five-year amortization of 
trademark and trade name ex- 
penditures (sec. 221 of the 
House bill and sec. 634 of the 
Senate amendment) 


2. Five-year amortization of pol- 
lution control facilities (sec. 
222 of the House bill) 





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(a) Same as House bill. 

Effective date. — Expenditures after De- 
cember 31, 1986. 

(b) No provision. 

(c) Same as House bill. 

Effective date. — Expenditures after De- 
cember 31, 1985. (As modified by floor 
amendment by Senators Kassebaum and 
Boren, adopted by voice vote.) 


Same as House bill. 

Effective date.— Dispositions of land con- 
verted to farming use after March 1, 1986. 


5=' 

.2 
d 

2 
ft 

d 
S 


41 

3 
O 
X 


(a) Retain provision, but limit it to im- 
provements consistent with USDA (or State) 
soil or water conservation plans. 

Effective date. — Expenditures after De- 
cember 31, 1985. 

(b) Repealed. 

Effective date. — Expenditures after De- 
cember 31, 1985. 

(c) Repealed. 

Effective date.— Expenditures after De- 
cember 31, 1985. 


Provides that gain on the disposition of 
converted wetland or highly erodible crop- 
land is treated as ordinary income, and any 
loss on the disposition of such property is 
treated as a long-term capital loss. 

Effective date. — Dispositions of land con- 
verted to farming use after December 31, 
1985. 


Farmers (including growers of nursery 
stock and ornamental trees (but not timber 
(see B., below)) are subject to the uniform 
capitalization rules generally applicable to 
producers of property (see VIII.D., below) if 
the plant or animal has a preproductive 
period of more than 2 years. However, cer- 
tain farmers (in general, those not required 
to use the accrual method of accounting 
under present law and those not part of 
a farming syndicate) may elect to deduct 
currently preproductive period costs. Tax- 
payers making this election must recapture 
these costs as ordinary income on disposi- 
tion of the product, and must use nonincen- 
tive depreciation on all farm assets placed 
in service in any year the election is in 
effect. 

Effective date. — Costs incurred after De- 
cember 31, 1985. 


03 

o 
ft 
o 

u 

a, 
c 

41 

'K 
a. 


(a) Repealed. 

Effective date. — Expenditures after De- 
cember 31, 1985. 

(b) Repealed. 

Effective date.— Expenditures after De- 
cember 31, 1985. 

(c) Repealed. 

Effective date.— Expenditures after De- 
cember 31, 1985. 


d 
_o 

1 
ft 
o 


In general, farmers would be subject to 
the uniform capitalization rules generally 
applicable to producers of property (see 
VIII.D., below) if the plant or animal pro- 
duced had a preproductive period of 2 years 
or longer. 

Effective date. — Costs incurred after De- 
cember 31, 1985. 


C 

V 

41 
U 

a. 


(a) Certain expenditures incurred by 
farmers for soil and water conservation im- 
provements may be expensed rather than 
capitalized. The deduction in each year may 
not exceed 25 percent of gross income de- 
rived from farming. 

(b) Certain expenditures incurred for fer- 
tilizer and soil conditioning may be ex- 
pensed rather than capitalized. 

(c) Certain expenditures incurred by 
farmers for land clearing may be expensed 
rather than capitalized. The deduction in 
any year may not exceed the lesser of $5,000 
or 25 percent of taxable income from farm- 
ing. 

_ 


Gain from the sale of real property used 
in a trade or business and held for more 
than 6 months is taxed as capital gain if 
gains on all sales of section 1231 assets (real 
property and depreciable personal property 
used in a trade or business and held for 
more than 6 months) during the year exceed 
losses on such sales. If losses on section 1231 
assets exceed gains, the net loss is an ordi- 
nary loss. 


The Code and regulations provide excep- 
tions from the otherwise applicable tax ac- 
counting rules for certain farmers. For 
example, certain farmers may elect to use 
the cash method of accounting when the 
accrual method otherwise would be re- 
quired, and may use simplified inventory 
methods if an accrual method is adopted. 
Most farmers use the cash method of ac- 
counting, and therefore, do not capitalize 
preproductive period expenses. 


E 

41 


A. Agricultural Provisions 

1. Special expensing provisions 

a. Soil and water conserva- 
tion expenditures (sec. 922 
of the House bill and sec. 
701 of the Senate amend- 
ment) 

b. Fertilizer and soil condi- 
tioning expenditures (sec. 
921 of the House bill) 

c. Land clearing expenditures 
(sec. 921 of the House bill 
and sec. 702 of the Senate 
amendment) 


2. Dispositions of converted wet- 
lands and highly erodible 
croplands (sec. 923 of the 
House bill and sec. 703 of the 
Senate amendment) 


3. Preproductive period ex- 
penses of farmers 

a. In general (sec. 905 of the 
House bill and sec. 302 of 
the Senate amendment) 



c 

V 

E 

S 

V 

E 

< 

s 


The present-law rules allowing a deduc- 
tion for costs incurred following loss or dam- 
age due to freezing temperatures, etc. is 
extended to persons other than the person 
who owned the grove, orchard, or vineyard 
at the time of the loss or damage, provided 
(1) the taxpayer who owned the property at 
such time retains an equity interest of more 
than 50 percent in the property, and (2) the 
person claiming the deduction owns part of 
the remaining equity interest and material- 
ly participates in the replanting and main- 
tenance of the property. 

Effective date. — Costs incurred after date 
of enactment. 


Farmers (not including timber growers) 
using the cash method of accounting may 
not deduct any amount paid for feed, seed, 
fertilizer or other supplies prior to the year 
in which supplies are used or consumed to 
the extent that more than 50 percent of the 
expenses incurred in the trade or business 
are prepaid. 

Effective date. — Prepayments made on or 
after March 1, 1986. 


§ 
1 

2 
ft 

o 

2 


Depreciation recapture income resulting 
from an installment sale of equipment used 
to irrigate farmland is recognized under the 
rules in effect prior to the Deficit Reduction 
Act of 1984. Accordingly, any depreciation 
recapture with respect to such equipment is 
recognized as gain is recognized under the 
installment method rather than entirely in 
the year of sale. 


QQ 

01 

to 
3 
O 

a 


Replanting and maintenance costs in- 
curred following loss of or damage to an 
orchard, grove, or vineyard of the taxpayer 
by reason of freezing temperatures, etc. are 
currently deductible even though replant- 
ing does not take place on the same proper- 
ty. Thus, costs incurred at a different 
location (although not in excess of the origi- 
nal acreage) but by the same taxpayer may 
qualify. 

Effective date. — Costs incurred after De- 
cember 31, 1985. 


d 
o 

]co 

'> 
o 

ft 
o 


Provides that the term "patent" includes 
a plant variety protection certificate for 
purposes of the provision allowing capital 
gains treatment on certain dispositions of 
patents. 

Effective date. — Dispositions after Decem- 
ber 31, 1985. 


d 

o 

'> 

2 
ft 

o 
2 


o 
a. 

2 

cu 

c 

01 

Si 


d 
o 

'm 
'> 

o 

ft 
o 
2 


G 
O 

Is 

o. 

o 


o 

la 

ft 
1 


d 
o 

'> 
o 
u 
ft 
o 

2 


cs 
.J 

c 

01 


Costs incurred in planting, cultivating, 
maintaining, or developing citrus or almond 
groves before the end of the fourth taxable 
year after planting must be capitalized. 
Farming syndicates must capitalize plant- 
ing and maintenance costs incurred with 
respect to other orchard or grove crops or 
vineyard crops until production of commer- 
cial quantities begins. However, if an or- 
chard, grove, or vineyard is lost or damaged 
by reason of freezing temperatures, 
drought, disease, pests, or casualty, other- 
wise deductible replanting and mainte- 
nance costs are currently deductible if the 
taxpayer replants the same property. 


Persons engaged in the trade or business 
of farming (not including timber growers) 
generally are permitted to use the cash 
method of accounting. However, farm syndi- 
cates are not allowed to deduct any amount 
paid for feed, seed or other supplies prior to 
the year in which such supplies are used or 
consumed. 


A sale or exchange of all substantial 
rights to a patent by the individual whose 
efforts created the patent generally pro- 
duces long-term capital gain. The Depart- 
ment of Agriculture administers a program 
pursuant to the Plant Variety Protection 
Act which extends protection to developers 
of sexually propagated plant varieties simi- 
lar to those provided to patent holders. 


In an installment sale of depreciable real 
or personal property, all depreciation recap- 
ture income under sections 1245 and 1250 is 
recognized in the taxable year of the dispo- 
sition, whether or not principal payments 
are received in that year. Any gain in excess 
of the depreciation recapture income is 
taken into account under the installment 
method. 


E 


b. Expenses relating to grove, 
orchard, and vineyard 
crops (sec. 905 of the 
House bill and sec. 705 of 
the Senate amendment) 


4. Prepayments of farming ex- 
penses (sec. 704 of the Senate 
amendment) 


5. Treatment of certain plant va- 
riety protection certificates as 
patents (sec. 925 of the House 
bill) 


6. Recapture income on install- 
ment sales of farm irrigation 
equipment (sec. 313 of the 
Senate amendment) 






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(a) Retains present law. 

(b) Same as House bill. 

Effective date.— Costs paid or incurred 
after December 31, 1986. 


d 

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(a) Same as present law, but requires 
recapture of both expensed development 
and exploration costs at the time the mine 
begins production. Recaptured amounts, 
and development costs incurred after the 
mine begins production, are recovered in 
the same manner as depreciable property in 
Class 1 (3-year recovery period). 

The 20 percent of corporate exploration 
and development costs that is expensed is 
recovered in the same manner as deprecia- 
ble property in Class 2 (5-year recovery 
period), beginning in the year that costs are 
paid or incurred. 

Effective date. — Costs paid or incurred 
after December 31, 1985. 

(b) Foreign exploration and development 
costs are recovered 

(i) over a 10-year, straight-line amor- 
tization schedule, or 

(ii) at the election of the taxpayer, as 
part of the basis for cost depletion. 

Effective date. — Cost paid or incurred 
after December 31, 1985. 


With the exceptions below, mineral deple- 
tion rates are phased down ratably to 5 
percent in 1988. Minerals having a 5-per- 
cent present-law rate (e.g., sand, gravel, and 
certain clay) are phased down ratably to 
in 1988. In conjunction with these changes, 
the 50 percent of net income limitation is 
phased down ratably to 25 percent. 

Present law depletion (rate and net in- 
come limitation) is retained for 

(i) minerals used to produce fertilizer 
or animal feed ("agricultural miner- 
als"), and 
(ii) dimension stone. 

Effective date— Production after Decem- 
ber 31, 1985. 


» 

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o 

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u 


(a) Retains present law. 

(b) Retains present law. 


Phases out percentage depletion of hard 
minerals ratably over a 5-year period. 

The basis for cost depletion of hard miner- 
als would be indexed for inflation. 

Effective date.— Production after Decem- 
ber 31, 1985. 


e 

a. 


(a) Exploration and development costs as- 
sociated with mines and other hard mineral 
deposits may be deducted currently at the 
election of the taxpayer. Exploration (but 
not development) costs which have been 
deducted currently either (1) are applied to 
reduce depletion deductions, or (2) at the 
taxpayer's election, are recaptured in in- 
come once the mine begins production, and 
then recovered as a depletable expense. 

In the case of corporations, only 80% of 
hard mineral exploration and development 
costs may be expensed. The remaining 20% 
must be recovered over the 5-year ACRS 
depreciation schedule (beginning in the 
year that exploration and development 
costs are paid or incurred), with an invest- 
ment tax credit for domestic costs. 

(b) Foreign exploration costs must be cap- 
italized to the extent the taxpayer's foreign 
and domestic exploration costs exceed 
$400,000. 


Depletable costs with respect to hard min- 
eral deposits must be recovered using the 
greater of— 

(i) cost depletion, or 
(ii) percentage depletion at the appli- 
cable statutory rate for the mineral. 
Percentage depletion may not exceed 50% 
of net income from the property in any 
taxable year. 

For corporations only, percentage deple- 
tion of coal or iron ore, in excess of adjusted 
basis (determined without regard to the de- 
pletion deduction for that year), is reduced 
by 15 percent. 


E 

a; 


D. Hard Minerals 

1. Exploration and development 
costs (sec. 262 of the House 
bill and sec. 716 of the Senate 
amendment) 

a. General rule 
b. Foreign exploration costs 


2. Percentage depletion of hard 
mineral deposits (sec. 261 of 
the House bill) 



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The 9-cents-per-gallon exemption is re- 
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31, 1985. 


The 4-cents-per-gallon motor fuels tax ex- 
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per barrel of alcohol) exemption from the 
excise tax on special motor fuels is provided 
for neat methanol and ethanol fuels which 
are not derived from petroleum or natural 
gas. A il cents exemption (equivalent to 
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derived from natural gas. Neat alcohol fuels 
are at least 85 percent methanol, ethanol, 
and other alcohol. Expires after 1992. 


A 4-cents-per-gallon partial exemption 
from the motor fuels taxes (9 cents for gaso- 
line and special motor fuels and 15 cents for 
diesel fuel) was provided for fuels used in 
qualifying taxicabs (through Sept. 30, 1985). 
The exemption was effectuated through a 
credit or refund (without interest). 


£ 

01 


5. Neat alcohol fuels (sec. 275 of 
the House bill and sec. 712 of 
the Senate amendment) 


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(a) The deduction for investment interest 
of noncorporate taxpayers is limited to net 
investment income plus certain deductible 
expenditures in excess of rental income 
from net lease property. Consumer interest 
is not deductible. 

(b) Same as House bill. 

(c) No provision. 


(a) Investment interest (in conformity 
with the passive loss rule) includes all inter- 
est subject to limitation in the House bill as 
well as other interest attributable to an 
activity in which the taxpayer does not 
materially participate (or in the case of 
rental real estate activities, does not ac- 
tively participate). Consumer interest 
means interest not attributable to a trade or 
business or an activity engaged in for profit. 

(b) No provision. 


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(a) The deduction for nonbusiness interest 
of noncorporate taxpayers is limited to 
$10,000 ($20,000 for joint returns), plus net 
investment income, plus certain deductible 
expenditures in excess of rental income 
from net lease property. 

(b) Interest on debt secured by the tax- 
payer's principal residence and a second 
residence of the taxpayer (to the extent of 
their fair market value) is not subject to 
limitation. 

(c) A residential lot is treated as a resi- 
dence and up to 6 weeks of time-sharing of 
residential properties is treated as one resi- 
dence. 


(a) Nonbusiness interest means all inter- 
est not incurred in the taxpayer's trade or 
business, including the taxpayer's share of 
interest of S corporations in whose manage- 
ment he does not actively participate, the 
taxpayer's share of interest expense of lim- 
ited partnerships in which he is a limited 
partner, and the taxpayer's share of interest 
expense of certain trusts and other entities 
in which he is a limited entrepreneur. 

(b) Interest expense attributable to low- 
income housing which is (i) very low income 
housing, (ii) certain bond-financed low- 
income housing, or (iii) housing eligible for 
5-year amortization of rehabilitation ex- 
penses under present law, is not subject to 
the limitation. 


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(a) The deduction for all nonbusiness 
interest of noncorporate taxpayers would be 
limited to the sum of $5,000, plus net 
investment income, plus certain deductible 
expenditures in excess of rental income 
from net lease property. 

(b) Interest on debt secured by the 
taxpayer's principal residence to the extent 
of its fair market value would not be subject 
to the limitation. 

(c) No provision. 


(a) Nonbusiness interest means all 
interest not incurred in a trade or business 
of the taxpayer, including the taxpayer's 
share of interest of S corporations in whose 
management he does not actively 
participate, and the taxpayer's share of 
interest expense of limited partnerships in 
which he is a limited partner. 

(b) No provision. 


.J 
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4) 
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The deduction for investment interest of 
noncorporate taxpayers is limited to the 
sum of $10,000, plus net investment income, 
plus certain deductible expenditures in ex- 
cess of rental income from net lease prop- 
erty. 

Other nonbusiness interest and business 
interest generally is not subject to limita- 
tion. 

Interest deductions not allowed due to 
this limitation carry over to future years. 


Investment interest means interest on 
debt to purchase or carry investment prop- 
erty. 


E 

41 


C. Nonbusiness Interest Limits (sec. 
402 of the House bill and sec. 1421 
of the Senate amendment) 

1. General limitation 


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(a) Same as House bill. 

(b) Same as House bill. 


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Taxable years beginning after December 
31, 1986, with a phase-in rule. 

Interest not disallowed under present 
law, but which is disallowed under the new 
provision, becomes subject to disallowance 
35 percent in taxable years beginning in 
1987, 60 percent in taxable years beginning 
in 1988, 80 percent in taxable years begin- 
ning in 1989, 90 percent in taxable years 
beginning in 1990, and 100 percent in tax- 
able years beginning after 1990. 


o> 

3 
O 


(a) Investment income is expanded to in- 
clude the same income items as under 
present law plus the taxable portion of net 
gain from the disposition of investment 
property, plus income from investments, in- 
terest from which would be investment in- 
terest under the provision (item 2 above). 

(b) Investment expense includes the de- 
preciation and depletion the taxpayer actu- 
ally utilized. 


Provides that, to the extent the taxpayer 
performs personal services in lieu of incur- 
ring deductible expenses with respect to 
leased property in certain circumstances, 
the value of such services may be included 
with the actual trade or business deductions 
in determining whether such deductions ex- 
ceed 15 percent of the rental income. 


Taxable years beginning after December 
31, 1985, with a phase-in rule. 

Interest not disallowed under present 
law, but which is disallowed under the new 
provision, becomes subject to disallowance 
ratably (10 percent per year) over 10 years 
commencing with taxable years beginning 
in 1986. 


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(a) Investment income would be 
expanded to include the same income items 
as present law plus the taxpayer's share of 
income from investments, interest from 
which would be investment interest under 
the proposal (item 2, above). 

(b) Investment expense would be 
determined the same as under present law 
except that the Treasury report RCRS 
depreciation schedule would be substituted 
for present-law straight-line depreciation. 


1 

3 

£ 

3 


Subject to two phase-in rules, the 
limitation would be effective for interest 
paid or incurred in taxable years beginning 
on or after January 1, 1986, regardless of 
when the obligation was incurred. The first 
phase-in rule is that the $10,000 limit under 
present law would be reduced to $5,000 for 
taxable years beginning on or after January 
1, 1988. The second phase-in rule is that 
interest not subject to the limitation under 
present law, but which would be subject to 
the expanded limitation, would become 
subject to the limitation ratably {10 percent 
per year) over 10 years commencing with 
taxable years beginning in 1986. 


c 

01 
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1- 
CU 


(a) Net investment income means invest- 
ment income net of investment expense. 
Investment income means interest, divi- 
dends, rents, royalties, short-term capital 
gain from disposition of investment proper- 
ty and depreciation recapture not from con- 
duct of a trade or business. 

(b) Investment expense means deductible 
investment expenses (other than interest), 
except that straight-line (not accelerated) 
depreciation over useful life, and cost (not 
percentage) depletion are used in calculat- 
ing investment expenses. 


Property subject to a net lease is treated 
as an investment, unless the trade or busi- 
ness deductions exceed 15 percent of the 
rental income. 




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If a corporate shareholder surrenders 
stock of the issuing corporation and receives 
a distribution for which the dividends re- 
ceived deduction would be available if the 
distribution were treated as a dividend, the 
transaction is generally treated as a sale of 
the surrendered stock. However, no loss is 
created if no loss would have been allowed 
under present law. (Floor amendment by 
Senator Stevens, adopted by voice vote.) 

Effective date. — Distributions after June 
23, 1986, unless pursuant to a binding con- 
tract in effect on that date. 


Same as House bill and President's pro- 
posal. 

Effective date. — Dividends received in 
taxable years beginning after December 31, 
1986. 


Same as House bill, with technical modifi- 
cations. 

Effective date. — The provision is effective 
for payments on or after March 1, 1986. 


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Same as President's proposal. 

Effective date. — Dividends received in 
taxable years beginning after December 31, 

1985. 


No portion of payments by a corporation 
in connection with a redemption of its own 
stock is deductible. 

Effective date.— No effective date is ex- 
pressly provided. 


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The dividend exclusion for individuals 
would be repealed. 

Effective date. — Taxable years beginning 
after December 31, 1985. 


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If a shareholder surrenders stock of the 
issuing corporation and receives a distribu- 
tion out of earnings and profits, the transac- 
tion is treated as a dividend, rather than a 
sale of the surrendered stock, unless speci- 
fied circumstances exist. 

If the transaction is treated as a sale, 
capital gain or loss treatment may apply to 
the difference between the amount of the 
distribution and the basis of the stock sur- 
rendered. The shareholder's basis in the 
remaining shares is equal to the basis of all 
of the taxpayer's shares prior to the sur- 
ender, reduced by the basis of the shares 
surrendered. 

If the transaction is treated as a dividend, 
the gross amount of the distribution is taxed 
as a dividend and the basis of the sharehold- 
er's remaining stock is not reduced. In the 
case of a corporate shareholder, the divi- 
dends received deduction generally is avail- 
able. 


The first $100 of qualifying dividends re- 
ceived by an individual ($200 by married 
couple filing a joint return) is excluded from 
income. 

Generally, qualifying dividends are divi- 
dends from domestic corporations. 


In general, a corporation may not deduct 
the cost of repurchasing its own stock from 
shareholders. Some corporations have taken 
the position that stock redemption pay- 
ments and related expenses for the purpose 
of preventing a hostile takeover of the cor- 
poration (so-called "greenmail" payments) 
are deductible as ordinary business ex- 
penses. 


E 

4) 


E. Corporate Shareholder Redemp- 
tions (sec. 637 of the Senate 
amendment) 


F. Dividend Exclusion for Individ- 
uals (sec. 313 of the House bill and 
sec. 612 of the Senate amendment) 


G. Stock Redemption Payments (sec. 
314 of the House bill and sec. 613 
of the Senate amendment) 



c 

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Generally, same as House bill. In addition 
to the principal substantive differences in 
the implementation of the general approach 
that are discussed below, there are various 
other technical and drafting differences. 
These include differences in the application 
of certain attribution and other rules to 
determine whether a change has occurred 
that brings the limitations into effect, and 
differences in the way in which the value of 
the corporation is determined in the case of 
certain transactions. 


In addition to certain related party excep- 
tions, transfers by reason of death, gift, 
divorce, or separation are disregarded. 

Acquisitions by ESOPs or ESOP partici- 
pants are also disregarded. 


S 

o 


Generally, if there is a more than 50 
percent change in ownership of a loss corpo- 
ration over a three-year period (however 
effected) the total NOL carryovers are not 
reduced but there is an annual limitation on 
their use after the change. In general, the 
annual amount of earnings against which 
the losses may be used after the change 
cannot exceed the value of the loss corpora- 
tion at the time of the change multiplied by 
a special rate of return (see item H.3., be- 
low). Similar rules apply for purposes of 
other carryover items in addition to net 
operating losses. 


In addition to certain related party excep- 
tions, if stock is acquired by reason of death, 
the transferee is treated as having owned 
stock during the period held by a decedent 
who was a family member. 


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NOL carryovers are eliminated or re- 
duced in different degrees and subject to 
different requirements, depending on 
whether the transaction takes the form of a 
taxable purchase or a tax-free reorganiza- 
tion, respectively. 

Under the 1954 Code, in the case of a 
taxable purchase, NOL carryovers are 
eliminated if one or more of the loss corpo- 
ration's ten largest shareholders increase 
their common stock ownership by more 
than 50 percentage points through taxable 
purchases within a two-year period, unless a 
business-continuation requirement de- 
scribed below is satisfied (item H.4). 

Under the 1954 Code, in the case of reor- 
ganizations subject to the rules, if the loss 
corporation's shareholders' continuing in- 
terest is less than 20 percent the NOL carry- 
over is reduced by 5 percent for each 
percentage point less than 20 received by 
such shareholders. 

Amendments were made by the Tax Re- 
form Act of 1976 that would substantially 
change these 1954 Code provisions, while 
retaining significant differences between 
the treatment of taxable purchases and tax- 
free reorganizations. The effective date of 
these amendments was repeatedly post- 
poned until January 1, 1986. Both the 
House bill and the Senate amendment, how- 
ever, repeal these amendments effective 
January 1, 1986. (See item 9., below, regard- 
ing status of amendments made by the Tax 
Reform Act of 1976.) 


In addition to certain related party excep- 
tions, acquisitions by gift or bequest (as well 
as certain other acquisitions) are not pur- 
chases subject to the taxable purchase rules. 


E 

2 


H. Special Limitations on Net Oper- 
ating (NOL) Carryovers (sec. 621 
of the House bill and sec. 321 of 
the Senate amendment) 

1. General rules 


2. Certain transfers of stock 
that are disregarded in deter- 
mining whether the special 
limitations apply 



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The rate that is applied to the loss corpo- 
ration's value to determine the annual limi- 
tation on use of NOL carryovers is the 
Federal mid-term bond rate, without any 
adjustment to provide a tax-exempt rate. 


d 
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2 


Generally same as House bill, with a 
shorter recognition period (5 years instead 
of 10 years) and a larger de minimis amount 
(25 percent instead of 15 percent). 

However, built-in depreciation deductions 
are not treated as built-in losses subject to 
the limitations. 


3 
O 


The rate that is applied to the loss corpo- 
ration's value to determine the annual limi- 
tation on use of NOL carryovers is the 
Federal long-term bond rate at the time of 
the ownership change, adjusted to take into 
account tax exemption for interest. 


NOL carryovers are eliminated in taxable 
purchases, as well as in tax-free reorganiza- 
tions, unless the loss corporation satisfies 
the continuity of business enterprise re- 
quirement that applies to tax-free reorgani- 
zations under present law, for the two-year 
period following the ownership change. 


The statutory limitations on NOL carry- 
overs apply to built-in losses (including built- 
in depreciation deductions), with relief for 
built-in gains. These rules apply to built-in 
gains and losses recognized during a 10-year 
recognition period following the change of 
ownership, subject to a de minimis rule 
where net built-in losses do not exceed 15 
percent of the value of the loss corporation. 


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In the case of a taxable purchase, NOL 
carryovers are eliminated if the loss corpo- 
ration fails to continue the conduct of a 
trade or business that was conducted before 
the ownership change. In the case of a tax- 
free reorganization there is no specific busi- 
ness continuation requirement apart from 
the continuity of business enterprise that is 
required for reorganization treatment. 


The statutory limitations on NOL carry- 
overs do not apply to built-in gains and 
losses. (Built-in gains and losses are, gener- 
ally, gains and losses not recognized at the 
time of an ownership change but attributa- 
ble to appreciation or depreciation that had 
occurred prior to that time.) However, 
under regulations, built-in losses (including 
depreciation deductions) are limited in cer- 
tain consolidated return situations, subject 
to a 15-percent de minimis rule. 


E 

01 


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a) 


(a) Creditors who receive stock in ex- 
change for their claims are treated as con- 
tinuing shareholders if the debt was held for 
one year before the filing of bankruptcy or 
arose in the ordinary course of the loss 
corporation's business. Thus, the special 
limitations do not apply after a bankruptcy 
reorganization or a stock-for-debt exchange 
that occurs as part of a bankruptcy reorga- 
nization, if such creditors and/or former 
shareholders retain a 50-percent interest in 
the corporation. Interest deductions on con- 
verted debt are backed out of NOL carry- 
overs if deducted during three-year period 
preceding bankruptcy proceeding. On a sec- 
ond ownership change within two years, 
NOL's are eliminated. 

(b) The special reorganization rules for 
financially troubled thrifts are retained. 
(See IX. D.l.) The NOL carryover rule for 
bankruptcy reorganizations ((a) above) 
applies to transactions involving financially 
troubled thrifts that receive special treat- 
ment under present law, but with modifica- 
tions generally to preserve NOL carryovers 
that would not be limited under present 
law. (See IX. D.2.) 


NOL carryovers are eliminated if two- 
thirds or more of loss corporation's asset 
value is attributable to assets held for in- 
vestment (except if a RIC or a REIT). 


The value of the loss corporation is re- 
duced by capital contributions made with a 
tax-avoidance motive. Capital contributions 
made within two years prior to the acquisi- 
tion date are presumed to have a tax- 
avoidance motive, except as provided in 
regulations. 


The new provisions are effective for 
purchases after December 31, 1986 and reor- 
ganizations pursuant to plans adopted after 
December 31, 1986 (subject to several 
targeted transition rules). The 1976 Act 
amendments are repealed, effective Janu- 
ary 1, 1986. 


5 

3 
O 

a 


(a) Creditors who receive stock in ex- 
change for their claims are treated as new 
stockholders, not continuing stockholders, 
for purposes of determining whether a 
change of ownership has occurred. Accord- 
ingly, after a bankruptcy reorganization or 
a stock-for-debt exchange that occurs as 
part of a bankruptcy reorganization, the 
limitations will apply if former creditors 
receive more than 50 percent of the compa- 
ny. In applying the rate of return limita- 
tion, a loss corporation's value is measured 
immediately after the change, thus taking 
account of additional positive value (if any) 
resulting from the surrender of creditors' 
claims. 

(b) The special rules for financially trou- 
bled thrifts are repealed. (See IX. D.l. and 
2.) 


If at least one-third of loss corporation's 
assets consists of passive assets, the income 
against which NOL carryovers can be used 
is subject to reduction. 


The value of the loss corporation is re- 
duced by the value of capital contributions 
made within three years prior to the acqui- 
sition date. 


Effective date. — The amendments are ef- 
fective for acquisitions on or after January 
1, 1986, and reorganizations pursuant to 
plans adopted on or after January 1, 1986, 
subject to general transition rules for bank- 
ruptcy reorganization and several targeted 
transition rules. The 1976 Act amendments 
do not come into effect at any time. 


"5 

1 
2 

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c 

a; 


No provision. 
No provision. 


1 ' 

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ft 
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2 


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0. 


(a) Special rules treat creditors who re- 
ceive stock in a bankruptcy proceeding as 
continuing stockholders, so that NOLs gen- 
erally are available without limitation. 
However, limitations can apply in some sit- 
uations involving trade creditors if there 
are not sufficient security holders. 

(b) Special rules enable certain acquisi- 
tions of financially troubled thrifts to 
qualify as tax-free reorganizations. (See 
IX. D.l.) In addition, there are special NOL 
rules for reorganizations involving finan- 
cially troubled thrifts. (See IX. D.2.) These 
rules provide treatment of depositors as 
continuing shareholders in a manner that 
preserves net operating loss carryovers in 
certain situations that could otherwise be 
viewed as invoking the special limitations 
due to ownership changes. 


There is no specific limitation on invest- 
ment assets. However, under the rule for 
taxable purchases, the loss corporation 
must hold assets used in a trade or business. 


2 
2b 

^ 3 

^a 
28 

^3 
It 
§1 

.22 'm 
S o- 

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ft 


The 1976 Act amendments apply to pur- 
chases after December 31, 1985, and reorga- 
nizations pursuant to plans adopted on or 
after January 1, 1986. 




6. Bankruptcy proceedings and 
stock-for-debt exchanges 

a. Bankruptcy proceedings 
generally 

b. Financially troubled 
thrifts 


-2 

1 

> 


8. Capital contributions 


9. Effective date and status of 
amendments made by Tax Re- 
form Act of 1976 



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Corporations, trusts, and other taxpayers 
besides individuals may be treated as ten- 
ant-stockholders in cooperative housing cor- 
porations. Maintenance and lease expenses 
are disallowed where payments by tenant- 
stockholders are allocable to amounts prop- 
erly chargeable to the capital account of the 
cooperative. 

Effective date. — Taxable years beginning 
after December 31, 1986. Special rules are 
provided for two limited profit cooperatives. 


A taxpayer is permitted to change its 
accounting year without consent in connec- 
tion with its initial election of REIT status. 
An entity is not disqualified from electing 
REIT status in the first taxable year of its 
existence because it was closely held. Part- 
ner to partner attribution is ignored in de- 
termining if the REIT is closely held. 
Corporations that have never qualified as a 
REIT and that have earnings and profits 
accumulated as a regular corporation are 
required to distribute accumulated earnings 
and profits in order to elect REIT status. 


REITs are permitted to hold assets in 
wholly owned subsidiaries. REIT qualifica- 
tion tests would be applied on an entity 
wide basis (i.e., ignoring the separate corpo- 
rate status of the subsidiaries). 

For a one-year period after the receipt of 
new equity capital, income from the tempo- 
rary investment of the new capital that is 
derived from stock or securities is treated as 
qualifying "75 percent income." 


3 
O 


Cooperative housing corporations that 
charge tenant-stockholders with a portion 
of the cooperative's interest and taxes in a 
manner that reasonably reflects the costs to 
the cooperative of the interest and taxes 
allocable to each tenant-stockholder's dwell- 
ing unit, may elect to have such tenant- 
stockholders deduct the separately allocated 
amounts. 

Effective date.— Taxable years beginning 
after December 81, 1985. 


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A tenant-stockholder in a cooperative 
housing corporation is entitled to deduct his 
or her "proportionate share" of the housing 
cooperative's expenses for interest and 
taxes. Tenant-stockholders generally are 
limited to individuals. 

The tenant-stockholder's proportionate 
share is the portion of the cooperative's 
interest and taxes that bears the same ratio 
to the cooperative's total expenses for inter- 
est and taxes that the portion of the coop- 
erative's stock held by the tenant- 
stockholder bears to the total outstanding 
stock of the cooperative. 


An entity that qualifies as a real estate 
investment trust ("REIT") is subject to a 
corporate tax but is allowed a deduction for 
dividends paid to shareholders. To qualify 
as a REIT, an entity (1) must be taxable as a 
domestic corporation, (2) must have at least 
100 shareholders, (3) must not have 50 per- 
cent or more of its stock held by five or 
fewer shareholders, (4) must distribute most 
of its income currently, (5) must hold a 
minimum percentage of its assets in real 
estate related and other passive assets, and 
(6) must derive minimum percentages of its 
income from such assets. A REIT is required 
to be a calendar year taxpayer unless it was 
in existence as a REIT for any taxable year 
beginning prior to October 4, 1976. 


In general, to meet the asset requirement, 
at the close of each quarter of the taxable 
year, at least 75 percent of the value of the 
REI'T's assets must be represented by real 
estate assets, cash and cash items, and Gov- 
ernment securities. 

In general, to meet the income require- 
ments, at least 75 percent of the REIT's 
gross income for the taxable year must be 
derived from rents on real property, inter- 
est on obligations secured by real property, 
gain from the sales of interests in real prop- 
erty (other than property held for sale in 
the ordinary course of a trade or business), 
dividends from a REIT, refunds of property 
taxes, and certain other limited sources. In 
addition, at least 95 percent of the REIT's 
gross income must be derived from these 
sources and interest or dividends or gains 
from the sale of securities. 


E 


N. Cooperative Housing Corpora- 
tions (sec. 1405 of the House bill 
and sees. 1703-1704 of the Senate 
amendment) 


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REITs are permitted to provide without 
being required to use independent contrac- 
tors those services that may be furnished in 
connection with the rental of real property 
by a tax-exempt organization without giving 
rise to unrelated business income. 

REITs are permitted to receive rents 
based on the net income of the tenant, 
provided that the tenant's profits are de- 
rived only from sources that would be quali- 
fied rent if earned directly by the REI"!. 


Any income that is accrued but not re- 
ceived with respect to original issue dis- 
count on a loan issued in connection with 
the sale of property, or with respect to a 
deferred rental agreement, or any income 
that is recognized as the result of the failure 
of an exchange that the REIT intended in 
good faith but that was ultimately deter- 
mined not to qualify for treatment as a tax- 
free like kind exchange, is not subject to the 
distribution requirement to the extent that 
such amounts exceed 5 percent of the 
REIT's taxable income. The REIT is re- 
quired to pay tax on the undistributed 
amount. 

The amount of a REIT's current earnings 
and profits will not be less than the REIT's 
taxable income for the purpose of determin- 
ing whether a distribution was made out of 
earnings and profits. 


REITs are permitted to compute their net 
capital gain without offset for net operating 
losses. NOL's not used to offset capital gain 
income would be carried over according to 
the ordinary rules. REITs are permitted to 
send capital gain notices to shareholders 
with the mailing of their annual report, 
rather than 30 days after year end. 


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Rents from real property include rents 
from interests in real property and charges 
for services customarily furnished in con- 
nection with the rental of real property 
whether or not such charges are separately 
stated. Rents are not considered to qualify if 
services are provided other than through an 
independent contractor. In addition, rents 
are not considered to qualify if they are 
based on the net profits of the tenant. 


In general, the distribution requirement 
is satisfied if for the taxable year the REIT 
distributes 95 percent of its taxable income 
determined without regard to any capital 
gains recognized by the REIT. 


If the REIT has recognized any capital 
gain during a taxable year, the REIT is 
taxable on the amount of such gain unless it 
elects to pay a capital gain dividend. 

The REIT may elect to pay a capital gain 
dividend by designating in a notice mailed 
to shareholders within 30 days of the end of 
the REIT's taxable year, that a portion of 
dividends paid during the taxable year are 
capital gain dividends. The portion so desig- 
nated may not exceed the REIT's net capital 
gain recognized reduced by any net operat- 
ing losses. Any dividend so designated is 
treated as a capital gain by the recipient 
shareholder. 


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The number of sales that a REIT is able to 
make within the prohibited transaction safe 
harbor is expanded from 5 to 7. An alterna- 
tive safe harbor is provided whereby a REIT 
may make any number of sales during a 
taxable year provided that the gross income 
from such sales does not exceed 15 percent 
of the REIT's taxable income for such year. 
The extent of improvements that a REIT is 
permitted to make is increased from 20 
percent to 30 percent of the property's ad- 
justed basis. Any marketing or development 
is required to be done through independent 
contractors. Losses from prohibited transac- 
tions are permitted to offset taxable income 
but are not permitted to offset gains from 
prohibited transactions. 


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A 100 percent tax is imposed on a REIT's 
net income from prohibited transactions. 
Any net loss from prohibited transactions is 
not deductible in computing taxable income. 

In general, a prohibited transaction is the 
sale of property held primarily for sale in 
the ordinary course of business. A safe har- 
bor is provided whereby a sale of property is 
not treated as a prohibited transaction if 
such property has been held for at least four 
years (for the production of rental income if 
land and improvements), the aggregate ex- 
penditures during the four-year period pre- 
ceding the date of sale that are includible in 
the basis of the property do not exceed 20 
percent of the selling price of the property, 
and the sale is one of not more than five 
sales of property by the REIT during the 
taxable year. In general, the disposition of 
property acquired pursuant to a foreclosure 
is not treated as a prohibited transaction. 


If it is determined that a REIT failed to 
satisfy the distribution requirement in a 
taxable year on account of a subsequent 
adjustment to its taxable income, then the 
REIT may avoid disqualification by the 
prompt distribution of a "deficiency divi- 
dend." A REIT for which such a deficiency 
is determined must pay interest on the defi- 
ciency as well as a penalty equal to the 
amount of interest not in excess of half of 
the amount of the deficiency. 




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Same as House bill, except that the ex- 
emption amount is reduced by 25 cents for 
each $1 that minimum taxable income ex- 
ceeds $150,000 ($112,500 for singles and 
$75,000 for marrieds filing separately). 


(a) Same as President's proposal and 
House bill. 

(b) Same as House bill, except that (1) 
effective date is delayed one year, (2) proper- 
ty grandfathered under the depreciation 
rules is treated as pre-1987 property, and (3) 
no special rule applies to low-income hous- 
ing. 

(c) Same as House bill, except that (1) 
effective date is delayed one year, and (2) 
property grandfathered under the deprecia- 
tion rules is treated as pre-1987 property. 


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(a) Same as President's proposal. 

(b) For property placed in service after 
1985, treat as a preference the excess of 
regular tax depreciation over the alterna- 
tive depreciation described above in the de- 
preciation section of the comparison (15 
years for certain low-income housing reha- 
bilitation). Same as present law for property 
placed in service before 1986. 

(c) For property placed in service after 
1985, treat as a preference the excess of 
regular tax depreciation over the alterna- 
tive depreciation (generally ADR midpoint 
lives) described in the depreciation section 
of the comparison. Same as present law for 
property placed in service before 1986 (i.e., 
for leased property only, excess over 
straight-line is a preference). 


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ly; 

(2) the first $10,000 of preferences; 
and 

(3) the taxpayer's personal exemp- 
tions. 


(a) Repealed for regular tax purposes. 

(b) Same as present law for real property 
placed in service before 1986. For real 
property placed in service beginning in 
1986, excess over Treasury I depreciation 
would be a preference. 

(c) Same as present law for property 
placed in service before 1986. For leased 
personal property placed in service begin- 
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tion over Treasury I depre- 
ciation would be a preference. 


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income base and at a lower rate than the 
regular tax, and payable to the extent in 
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(c) Solely for leased personal property, 
excess over straight-line depreciation is a 
preference. 


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A. Individual Minimum Tax (sec. 
501 of the House bill and sec. 1101 
of the Senate amendment) 
1. Structure 


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inition for regular tax purposes. 


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tax credits can not offset more than 90% of 
tentative tax liability. 


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respect to charitable contributions of appre- 
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untaxed appreciation allowed as a regular 
tax deduction or the amount of the taxpay- 
er's other preferences is treated as a prefer- 
ence. 


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Amount of minimum tax liability relating 
to deferral preferences allowed as a carry- 
forward credit against regular tax liability. 


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Allowed for all itemized deductions re- 
tained under the President's proposal, 
except 

(i) interest in excess of the sum of 
housing interest and net investment in- 
come; and 

(ii) for charitable contributions of ap- 
preciated property, the amount of un- 
taxed appreciation allowed as a regular 
tax deduction. 


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Allowed only for casualty and theft losses, 
gambling losses to extent of gambling gains, 
charitable deductions, medical deductions 
(to the extent in excess of 10 percent of 
adjusted gross income), interest expenses 
(restricted to housing interest plus net in- 
vestment income), and certain estate taxes. 


Taxpayers generally can elect to have 
minimum tax rules for measuring a particu- 
lar item apply for regular tax purposes. 


c 

1 
1 


Not allowed against minimum tax. Cred- 
its that do not benefit the taxpayer due to 
minimum tax can be used as credit car- 
ryovers against regular tax. 


Allowed against minimum tax (under lim- 
its similar to those applying under regular 
tax). 


Allowed against minimum taxable in- 
come. For years after 1982, minimum tax 
NOLs are reduced by the items of tax pref- 
erence. 






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Same as House bill, except that the ex- 
emption amount is reduced by 25 cents for 
each $1 that minimum taxable income ex- 
ceeds $150,000. 


(a) Same as House bill, except that (1) 
effective date is delayed one year, (2) proper- 
ty grandfathered under the depreciation 
rules is treated as pre- 1987 property, and (3) 
no special rule applies to low-income hous- 
ing. 

(b) Same as President's proposal and 
House bill. 

(c) Same as present law. 

(d) Same as House bill. 

(e) Same as House bill. 

(f) Same as House bill, except that (1) 
effective date is delayed one year, and (2) 
property grandfathered under the deprecia- 
tion rules is treated as pre- 1987 property. 

(g) Same as present law. 


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(a) For property placed in service after 
1985, treat as a preference the excess of 
regular tax depreciation over the alterna- 
tive depreciation described above in the de- 
preciation section of the comparison (15 
years for certain low-income housing reha- 
bilitation). Same as present law for property 
placed in service before 1986. 

(b) Same as President's proposal. 

(c) Same as present law for facilities 
placed in service before 1986; amortization 
rules repealed for regular tax purposes be- 
ginning in 1986. 

(d) Same as present law. 

(e) Same as present law. 

(f) For property placed in service after 
1985, treat as a preference the excess of 
regular tax depreciation over the alterna- 
tive depreciation (generally ADR midpoint 
lives) described in the depreciation section 
of the comparison. Same as present law for 
property placed in service before 1986 (i.e., 
solely for leased property placed in service 
by a PHC, excess over straight-line is a 
preference). 

One transitional rule is provided. 

(g) Same as President's proposal. 


"5 

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An alternative minimum tax, applying to 
a base of regular taxable income plus pref- 
erences, and payable to the extent in excess 
of regular tax liability. 


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(a) Same as present law for property 
placed in service before 1986; for property 
placed in service beginning in 1986, excess 
over Treasury I depreciation would be a 
preference. 

(b) Capital gain fully included in mini- 
mum taxable income. 

(c) Same as present law for facilities 
placed in service before 1986; amortization 
rule repealed for regular tax purposes be- 
ginning in 1986. 

(d) Bad debt reserve deduction would be 
repealed for regular tax purposes. 

(e) Same as present law for property 
placed in service before 1986; for property 
placed in service beginning in 1986, excess 
over cost depletion would be a preference. 

(f) Same as present law for property 
placed in service before 1986. For leased 
property placed in service by a PHC begin- 
ning in 1986, excess of regular depreciation 
over Treasury I depreciation would be a 
preference. For all personal property, the 
lesser of (i) excess over Treasury I deprecia- 
tion, or (ii) 25 percent of the corporation's 
net interest expense would be a preference. 

(g) Treat as a preference for all corpora- 
tions. 


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(a) Excess over straight-line depreciation 
is a preference. 

(b) Benefit of lower rate on capital gains is 
a preference. 

(c) Excess over depreciation otherwise al- 
lowable is a preference. 

(d) Excess of deduction over amount al- 
lowable under the experience method is a 
preference. 

(e) Excess over adjusted basis of the de- 
pletable property is a preference. 

(f) Not a preference except for personal 
holding companies (PHCs). For PHCs, ap- 
plying solely to leased personal property, 
excess over straight-line depreciation is a 
preference. 

(g) Solely for PHCs, excess over 10-year 
amortization is a preference. 


E 

4) 


1 — 

B. Corporate Minimum Tax (sec. 501 
of the House bill and sec. 1101 of 
the Senate amendment) 
1. Structure 


01 


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4. Tax preferences 

a. Accelerated depreciation 
on real property 

b. Capital gain preference 

c. 60-month amortization of 
certified pollution control 
facilities 

d. Bad debt reserve deduction 
for financial institutions 

e. Percentage depletion 

f. Accelerated depreciation 
on personal property 

g. Expensing of mining ex- 
ploration and development 

costs 



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Earnings of a corporation that does not file 
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Certain Alaska native corporations may 
calculate book income using the asset bases 
determined under the Alaska Native Claims 
Settlement Act. Certain amounts paid to- 
other Alaska native corporations may be 
treated as expenses for book purposes in the 
same year as the amounts are deductible for 
tax purposes. (Floor amendment by Senator 
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to deferral preferences is allowed as a carry- 
forward credit against regular tax liability. 


(a) Same as House bill. 

(h) No provision. 

(c) Same as House bill. 


Same as House bill, except that foreign 
tax credits can not offset more than 90% of 
tentative tax liability. 


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V 


Same as House bill except that purchas- 
ers of goods for resale having average annu- 
al gross receipts in excess of $5 million 
generally are subject to the uniform capital- 
ization rules. Thus, costs (including general 
and administrative costs) attributable to 
purchasing, transporting, repackaging or 
other processing, and storage of goods, and 
other similar costs associated with the 
goods, are to be treated as inventory costs. 

See, IV.A.3. and IV.B.l., respectively, 
regarding exceptions from the uniform capi- 
talization rules for farmers and producers of 
timber. 

Effective date. — Taxable years beginning 
after December 31, 1986. Depreciation on 
property placed in service before March 1, 
1986, is not subject to the new capitalization 
rules. The section 481 adjustment is to be 
spread ratably over a period of not more 
than 5 years under the rules applicable to a 
change in a method of accounting initiated 
by the taxpayer. 


Same as House bill. 

Effective date. — Costs incurred after De- 
cember 31, 1986, unless incurred in connec- 
tion with property on which substantial 
construction occurred before March 1, 1986. 


n 

CO 

3 
O 

X 


Generally the same as the President's 
proposal. See, IV.A.3. and IV.B.l., respec- 
tively, regarding special rules (differing 
from those in the President's proposal) ap- 
plicable to farmers and producers of timber. 

Effective date. — Taxable years beginning 
after December 31, 1985. The section 481 
adjustment is to be spread ratably over a 
period of not more than 5 years under the 
rules applicable to a change in a method of 
accounting initiated by the taxpayer. 


Costs (other than research and experi- 
mental costs) incurred in connection with 
construction of noninventory property and 
self-use property are subject to the uniform 
capitalization rules. 

Effective date. — Costs incurred after De- 
cember 31, 1985. 


■« 

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a. 



ii 

CU 

c 


Comprehensive capitalization rules (here- 
inafter, the "uniform capitalization rules") 
would apply to the manufacture of inven- 
tory goods. These rules essentially would 
parallel the full absorption rules, but would 
require that most financial conformity costs 
be inventoried. In addition, all tax deprecia- 
tion, current pension and fringe benefit 
costs, and a portion of general and adminis- 
trative expenses would be treated as inven- 
tory costs. However, research and 
experimental costs (within the meaning of 
sec. 174) would not be subject to capitaliza- 
tion in the case of inventory. Special rules 
would apply to farmers (see IV.A.3). No 
special rules would apply to producers of 
timber. 

Effective date. — Taxable years beginning 
after December 31, 1985. The section 481 
adjustment would be spread ratably over a 
period of not more than 6 years under the 
rules applicable to a change in a method of 
accounting initiated by the taxpayer. 


Cost (other than research and experimen- 
tal costs) incurred in connection with con- 
struction of noninventory property and self- 
use property would be subject to the uni- 
form capitalization rules. 

Effective date.— Costs incurred after De- 
cember 31, 1985, unless incurred in connec- 
tion with property on which substantial 
construction had begun on or before that 
date. 


c 

V 

to 

CU 


Manufacturers generally must accumu- 
late costs of producing "inventory" goods in 
an inventory account. Costs in the inven- 
tory account may be deducted only as the 
goods to which they relate are disposed of. 

Under regulations, the "full absorption 
method" determines which costs are includ- 
ible in inventory. All direct production 
costs, including costs of materials incorpo- 
rated into the product or consumed during 
production and labor directly involved in 
manufacturing, must be inventoried. The 
treatment of indirect production costs var- 
ies according to the nature of the cost: some 
costs are deductible; others are inventoria- 
ble; others ("financial conformity" costs) are 
deductible only if deducted by the taxpayer 
for financial reporting purposes. 

Purchasers of goods for resale (e.g., whole- 
salers and retailers) must include in inven- 
tory the invoice price of the purchased 
goods plus transportation and other neces- 
sary costs incurred in acquiring possession. 


The costs of acquiring, constructing, or 
improving buildings, machinery, equip- 
ment, or other assets having a useful life 
beyond the end of the taxable year are not 
currently deductible. These "capital ex- 
penditures" become part of the basis of the 
asset, and may be recoverable over the use- 
ful life of the property through depreciation 
or amortization deductions if the property is 
held for business or investment purposes. 
Any unrecovered basis may be offset 
against the amount realized if the property 
is sold. 

Although a taxpayer's direct costs of con- 
structing an asset for its own use or a non- 
inventory asset produced for sale must be 
capitalized, the proper treatment of many 
indirect costs is uncertain. 


E 

01 


D. Capitalization Rules for Invento- 
ry, Construction, and Develop- 
ment Costs (sec. 905 of the House 
bill and sec. 302 of the Senate 
amendment) 
1. Inventory 


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4> 

IX! 


The deferral of income for three months 
or less does not constitute a business pur- 
pose. (Floor amendment by Senator Mitch- 
ell, adopted by voice vote.) 

Effective date. ^Taxable years beginning 
after 1986. Partners of partnerships and 
shareholder of S corporations that are re- 
quired to include items from more than one 
taxable year of the partnership or S corpo- 
ration in any taxable year will take the net 
income of any short taxable year into ac- 
count ratably over 4 years. An election to 
include all such income in the first taxable 
year is provided. Personal service corpora- 
tions required to change their taxable years 
must annualize the income for that year. 


Same as President's proposal. Any adjust- 
ment required to be made as a result of the 
change in method of accounting will be 
reduced by the amount of any suspense 
account and included in income over a 
period not to exceed five taxable years. 

Effective date.— Taxable years beginning 
after December 31, 1986. 


Accrual basis providers of utility services 
are required to recognize income attributa- 
ble to the furnishing or sale of utility serv- 
ices to customers not later than the taxable 
year in which such services are provided. 
The adjustment to income resulting from 
the change in accounting method is recog- 
nized ratably over four years. 

Effective date. — Taxable years beginning 
after December 31, 1986. 


3 
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The election to deduct the cost of redeem- 
ing "qualified discount coupons" received 
after the close of the taxable year would be 
repealed. Any portion of the delayed deduc- 
tion from the first year of election, which 
has not yet been allowed as a deduction, 
would be deductible in the first taxable year 
for which the proposal is effective. 

Effective date.— The proposal would be 
effective for taxable years beginning after 
December 31, 1985. 


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An accrual-basis taxpayer may elect to 
deduct the cost of redeeming "qualified dis- 
count coupons" outstanding at the close of 
the taxable year and received for redemp- 
tion up to 6 months following the close of 
the taxable year (sec. 466). A "qualified 
discount coupon" is one which is issued and 
redeemable by the taxpayer and which al- 
lows a discount of not more than $5 on the 
purchase price of merchandise or other tan- 
gible personal property. For the first year to 
which an election applies, a special rule 
delays a portion of the deduction attributa- 
ble to the election to prevent a bunching of 
deductions. 


Utilities using the accrual method of ac- 
counting are allowed to defer the recogni- 
tion of income attributable to services 
provided to customers during the taxable 
year, but after the last meter reading date 
occurring within the taxable year. 


E 


G. Taxable Years of Partnerships, S 
Corporations, and Personal Serv- 
ice Corporations (cent.) 


H. Special Treatment of Certain 
Items 

1. Qualified Discount Coupons 
(sec. 324 of the Senate amend- 
ment) 


2. Utilities using accrual ac- 
counting (sec. 322 of the Sen- 
ate amendment) 



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No provision. 


The election for solvent taxpayers to re- 
duce the basis of depreciable property rath- 
er than currently recognize income from the 
discharge of qualified business indebtedness 
is repealed. 

No change is made in the treatment of 
discharges of indebtedness that occur in 
title 11 (bankruptcy) cases or when a tax- 
payer is insolvent. 

Effective date. — Discharges of indebted- 
ness occurring after December 31, 1986. 


3 
O 


The bill repeals the provision of present 
law allowing contributions in aid of con- 
struction to be treated as nontaxable contri- 
butions to capital. 

Effective date. — Contributions received 
after December 31, 1985. 


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A regulated public utility that provides 
electric energy, gas, water or sewage dispos- 
al services may treat contributions received 
in aid of construction as nontaxable contri- 
butions to capital. 


Solvent taxpayers who would otherwise 
be required to currently recognize income 
from the discharge of qualified business in- 
debtedness may elect to reduce the basis of 
depreciable property instead of currently 
recognizing such income. 


E 


3. Contributions in aid of con- 
struction (sec. 908 of the 
House bill) 


4. Discharge of indebtedness of 
solvent taxpayers (sec. 323 of 
the Senate amendment) 



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Same as House bill, except that the provi- 
sion requires the use of sex neutral mortali- 
ty tables for purposes of determining the 
amounts in the nature of interest. 

Effective date.— The provision generally 
is effective for amounts received by a benefi- 
ciary with respect to deaths occurring after 
December 31, 1986. 


Same as President's proposal. 

Effective date.— Assignments entered into 
after December 31, 1986. 


Provides that a deduction for interest on 
policyholder loans is not allowed in the case 
of loans aggregating more than $50,000 per 
officer, employee, or owner of an interest in 
a trade or business carried on by the tax- 
payer. (See also. Nonbusiness interest lim- 
its, item V.C. above.) 

(Floor amendment by Senator Dole, 
adopted by voice vote. 

Effective date.— The provision is effective 
for interest on loans under policies pur- 
chased after June 20, 1986. 


5 

at 
to 
3 
O 
S 


Repeals the $1,000 annual exclusion for 
the amounts in the nature of interest re- 
ceived by the surviving spouse of an in- 
sured. 

Effective date.— The provision generally 
is effective for amounts received by a benefi- 
ciary with respect to deaths occurring after 
December 31, 1985. 


Retains present law, but limits the exclu- 
sion for structured settlement agreements 
to cases involving physical injury or sick- 
ness. 

Effective date. — Assignments entered into 
after December 31, 1985. 


No statutory provision, but restates 
present-law rule that no amount paid or 
accrued on indebtedness incurred or contin- 
ued to purchase or carry a single premium 
life insurance contract is deductible. (See, 
also, Nonbusiness interest limits, item 'V.C., 
above.) 


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Under the President's proposal, third- 
party assignees of liabilities to make period- 
ic personal injury damage payments would 
include the full amount of consideration 
received from the assignor in gross income. 
An assignee purchasing an annuity contract 
to fund its liabilities to an injured party 
would be treated as the owner of the annu- 
ity and would be taxed on the income com- 
ponent of all amounts paid to it under the 
terms of the annuity contract. The assignee 
would be given an election concerning the 
tax treatment (i.e., the timing of its deduc- 
tion), and if the taxpayer makes the elec- 
tion, its basis in the annuity is not reduced 
by the deduction. 

Effective date.— The proposal would be 
effective for all assignments entered into 
after December 31, 1985. 


The President's proposal did not recom- 
mend any specific changes relating to the 
tax treatment of policyholder loans. How- 
ever, the President's proposal would gener- 
ally limit the deduction for nonbusiness in- 
terest to the sum of net investment income, . 
interest on debt secured by the taxpayer's 
principal residence (up to its value), and 
$5,000. 

Effective date.— The nonbusiness interest 
limitation generally would be effective (sub- 
ject to two phase-in rules) for interest ex- 
pense paid or incurred after December 31, 

1985. 


e 
a. 


A beneficiary of a life insurance policy 
may receive installment payments of the 
proceeds of the policy. Amounts in the na- 
ture of interest (up to $1,000 annually) on 
the unpaid proceeds of the policy paid to the 
surviving spouse of the insured are not in- 
cluded in the spouse's income. 


Present law excludes from income the 
amount of any damages received on account 
of personal injuries or sickness, whether by 
suit or agreement and whether as a lump 
sum or as periodic payments. The person 
liable to pay the damages may assign to a 
third party (a structured settlement compa- 
ny) the obligation to pay the periodic pay- 
ments. The portion of the amount received 
by that third party for agreeing to the as- 
signment that is used to purchase assets to 
fund the liability is not included in the third 
party's income. 

The overall effect of these rules is that no 
taxpayer is subject to tax on the investment 
income earned on assets used to fund the 
periodic payment of damages for personal 
injuries. 


Life insurance policies often permit the 
policyholder to borrow up to the cash sur- 
render value of the policy. Until repaid, the 
policyholder loan reduces the proceeds pay- 
able to the policyholder in the event of a 
surrender of the policy or to the benefici- 
aries in the event of the death of the policy- 
holder. 

Under present law, policyholder loans 
generally are treated as loans and not as 
withdrawals from the policy. Interest paid 
on policyholder loans generally is deducti- 
ble by the policyholder. 

No deduction is allowed for amounts paid 
or accrued on indebtedness incurred or con- 
tinued to purchase or carry a single premi- 
um life insurance contract. 


E 

Ol 


A. Insurance Products 

1. Exclusion for interest on in- 
stallment payments of life in- 
surance proceeds (sec. 1001 of 
the House bill and sec. 1001 of 
the Senate amendment) 


2. Structured settlements (sec. 
1003 of the House bill and sec. 
1002 of the Senate amend- 
ment) 


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s 

< 

s 

41 


Provides that future increases in death 
benefits may be taken into account in deter- 
mining whether the definition of life insur- 
ance contracts is satisfied with respect to 
certain policies to cover prearranged funer- 
al expenses. Such contracts can qualify as a 
life insurance contract if the initial death 
benefit is $5,000 or less (treating all con- 
tracts issued to the same contract owner as 
one contract), and if the contract provides 
for fixed annual increases in the death ben- 
efit not exceeding 10 percent of the initial 
death benefit or 8 percent of the death 
benefit at the end of the preceding year. 

(Floor amendment by Senator Long, 
adopted by voice vote.) 


No provision. 

Effective date. — Contracts issued after 
December 31, 1984. 


5 

m 
3 
O 

a 


d 
_o 

'> 

2 
a. 
o 

2; 


Retains present law, but the casualty loss 
deduction is denied to the extent that an 
individual has insurance coverage on non- 
business property and elects not to file a 
claim. 

Effective date. — The provision is effective 
for taxable years beginning after December 
31, 1985. 


■« 

o 
a 

£ 

a. 

c 

41 

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01 

k. 
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d 
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Under the President's proposal, taxpayers 
suffering losses covered by insurance would 
be permitted to elect to claim a deduction 
with respect to those losses without regard 
to the prospect of recovery from the insur- 
ance company. Insurance proceeds would be 
taxable income when received to the extent 
of any portion of the loss that was previous- 
ly deductible. Present law would continue to 
apply to nonelecting taxpayers. 

Effective date. — The proposal would be 
effective for all losses incurred in taxable 
years beginning after December 31, 1985, 
that are insured under policies issued after 
December 31, 1985. 


CS 

c 

11 

41 


A life insurance contract generally is de- 
fined as a contract which meets either (Da 
cash value accumulation test, or (2) a test 
consisting of a guideline premium require- 
ment and a cash value corridor require- 
ment. Future increases in death benefits 
may cause a contract not to qualify under 
these tests. 


A taxpayer generally may deduct a loss 
sustained during the taxable year and not 
compensated for by insurance or otherwise. 
The casualty loss deduction is allowable 
only to the extent that the losses exceed 10 
percent of the taxpayer's adjusted gross in- 
come (AGI). 

If a casualty or other event occurs which 
results in a claim for reimbursement with 
respect to which there is a reasonable pros- 
pect of recovery (such as an insurance 
claim), then the loss may not be deducted 
until it can be ascertained with reasonable 
certainty that the reimbursement will not 
be received. 

Some recent cases have held that the 
deduction is allowable when an individual 
has insurance coverage on nonbusiness 
property, but elects not to file a claim. 


£ 

01 


4. Treatment of policies to cover 
prearranged funeral expenses 
(sec. 1825 of the Senate 
amendment) 


5. Deduction for policyholder 
losses (sec. 1002 of the House 
bill) 






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Same as House bill. 

Effective date.— Same as House bill. 


Includes annually in income of a property 
and casualty company 20 percent of the 
increase (if any) in the unearned premium 
reserve. 

Also includes in income, ratably over 7 V'2 
years, 20 percent of the company's un- 
earned premium reserve at the beginning of 
the year in which the provision is first 
effective. A company that ceases to be sub- 
ject to tax as a property and casualty insur- 
ance company must include the amount not 
yet included in income under this provision. 

For this purpose, the unearned premium 
reserve does not include life insurance re- 
serves. 

With respect to insurance against default 
in the payment of principal or interest on 
securities with a maturity of 5 years or 
more, the amount included in income is 10 
percent of the increase (if any) in the un- 
earned premium reserve, and 10 percent, 
ratably over 7 ¥2 years, of the company's 
unearned premium reserve at the beginning 
of the taxable year in which the provision is 
first effective. 

Effective date. — The provision is effective 
for taxable years beginning after December 
31, 1986. 


3 
O 
X 


A life insurance company is permitted to 
apply its current loss from operations and 
its unused loss carryovers to offset taxable 
income from amounts deemed distributed 
from its policyholder surplus account (PSA) 
if (1) the company was insolvent on Novem- 
ber 15, 1985, (2) the company is liquidated 
pursuant to a court order in a title 11 or 
similar case, and (3) as a result of the liqui- 
dation, the company's tax liability would be 
increased due to distributions from the 
PSA. 

Effective date. — The provision applies to 
liquidations on or after November 15, 1985. 

1 


Includes in income of a property and cas- 
ualty company 20 percent of the increase (if 
any) in the unearned premium reserve. 

Also includes in income, ratably over 5 
years, 20 percent of the company's un- 
earned premium reserve at the beginning of 
the year in which the provision is first 
effective. 

Effective date. — The provision is effective 
for taxable years beginning after December 
31, 1985. 


o 
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c 

01 

0. 


3 
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o 
2 


Unearned premiums would be subject to 
the QRA proposal (see loss reserve discount- 
ing, item 3, below). 


CO 

J 
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ir, 

01 


The Life Insurance Company Tax Act of 
1984 repealed the deduction for additions to 
a policyholders surplus account (PSA), 
which was originally adopted to provide a 
cushion of assets to protect the interests of 
the policyholders. However, a stock life in- 
surance company is required to include in 
income any amount deemed to be distribut- 
ed from an existing PSA. 


A property and casualty insurance com- 
pany may generally deduct incurred premi- 
um acquisition expenses, even though 
taxation of the associated premium income 
may be deferred, by means of the unearned 
premium reserve deduction, to the period to 
which the premium income relates. 


E 

01 


5. Operations loss deduction of 
insolvent companies (sec. 1013 
of the House bill and sec. 1012 
of the Senate amendment) 


C. Property and Casualty Insurance 
Companies 

1. Treatment of acquisition ex- 
penses (sec. 1021 of the House 
bill and sec. 1021 of the Senate 
amendment) 






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relationship to the company's net gain from 
operations (as reported on the company's 
annual statement for financial accounting 
purposes). This rule provides that regular 
taxable income of a property and casualty 
insurance company is not less than 20/36 of 
its adjusted net gain from operations, and 
its regular taxable loss is not more than 
20/36 of its adjusted net loss from oper- 
ations, as set forth in its annual statement. 
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tion of certain dividends received attributa- 
ble to investments made before November 
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gain or loss from operations. 

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come, and consolidated taxable income of 
property and casualty members of an affili- 
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rately before being taken into account in 
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the entire consolidated group. 

Effective date. — The provision is effective 
for taxable years beginning after December 
31, 1987. 


Requires the Secretary of the Treasury to 
submit to the Congress a study of the treat- 
ment of policyholder dividends by mutual 
property and casualty insurance companies 
and whether any changes in such treatment 
would be appropriate. This study is due not 
later than January 1, 1987. 


to 
O 

a 
o 

a. 
c 

•a 


No provision. 


The President's proposal would require 
the deduction for policyholder dividends of 
mutual property and casualty companies to 
be reduced in a manner similar to the re- 
duction applicable to mutual life insurance 
companies. The proposal states that addi- 
tional study is needed to determine the size 
of the competitive advantage that the cur- 
rent treatment of policyholder dividends 
provides to mutual property and casualty 
companies and to set the appropriate deduc- 
tion limitation. 

Effective date. — The proposal would be 
effective for taxable years beginning after 
December 31, 1985. 


CO 

c 

Cl. 


No special provision of present law re- 
quires that the taxable income of a property 
and casualty insurance company bear a re- 
lationship to its net gain from operations as 
reported on its annual statement for finan- 
cial accounting purposes. 


Under present law, property and casualty 
insurance companies (whether stock or mu- 
tual) are generally permitted to deduct divi- 
dends and similar distributions paid or 
declared to policyholders in their capacity 
as such. Stock companies may not, however, 
deduct dividends paid to shareholders. 

This distinction between policyholder and 
shareholder dividends also exists in the case 
of life insurance companies, but deductible 
policyholder dividends paid by mutual life 
insurance companies are reduced by an 
amount intended to reflect the portion of 
the distribution allocable to the companies' 
earnings and profits (as distinguished from 
the portion that is a policyholder rebate). 


E 


4. Treatment of net gain from 
operations (sec. 1023 of the 
House bill) 


5. Limiting policyholder divi- 
dend deduction for mutual 
companies (sec. 1026 of the 
House bill) 



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(b) Same as House bill. 

Effective dates. — Years beginning after 
December 31, 1988. 

In the case of certain collectively bar- 
gained plans, the provisions would not be 
effective before years beginning before the 
earlier of— 

(1) the later of January 1, 1989, or the 
termination of the collectively bar- 
gained agreement, or 

(2) January 1, 1991. 


1 

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(b) If the special nondiscrimination tests 
for employer matching and employee con- 
tributions are not satisfied for a year, the 
bill provides that — 

(1) the excess contributions are sub- 
ject to a 10-percent excise tax unless 
distributed (with earnings) within 2^/2 
months after the end of the year, 

(2) unless the excess contributions 
(plus earnings thereon) are distributed 
no later than the end of the following 
year, the plan will be retroactively dis- 
qualified. 

Effective dates.— Years beginning after 
December 31, 1985. 

In the case of certain collectively bar- 
gained plans, the provisions are not effec- 
tive until years beginning on or after the 
earlier of — 

(1) the termination of the collective 
bargaining agreement, or 

(2) January 1, 1991. 

In addition, with respect to any plan that 
is maintained by a State or local govern- 
ment and that was in existence on Novem- 
ber 6, 1985, the provisions do not apply until 
years beginning after November 21, 1987. 


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(b) Under the proposal — 

(1) the employer would be denied a 
deduction for any contributions on be- 
half of highly compensated employees 
in excess of the amount permitted 
under the matching contribution rules, 

(2) those excess contributions would 
be subject to a nondeductible 10-percent 
excise tax, and 

(3) unless the excess contributions 
(plus earnings thereon) were distribut- 
ed by the end of the plan year following 
the year for which the contributions 
were made, the plan would be retroac- 
tively disqualified. 

Effective date. — The proposals would 
apply generally to plan years beginning 
after December 31, 1985. 

For collectively bargained plans, the pro- 
posals would apply to plan years beginning 
after the termination of the collective 
bargining agreement. 


(a) The proposal would provide that the 
rules relating to eligible deferred compensa- 
tion plans would apply also to unfunded 
deferred compensation plans for employees 
of tax-exempt employers. 




C 
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(b) If employer matching contributions 
discriminate in favor of employees who are 
officers, shareholders or highly compensat- 
ed, the plan is disqualified. 


(a) Under an eligible deferred compensa- 
tion plan maintained by a State or local 
government or rural electric cooperative, an 
employee may elect annual deferrals equal 
to the lesser of $7,500 or 331/3 percent of 
compensation (net of the deferral). A partic- 
ipant in an eligible plan who elects to defer 
the receipt of current compensation will be 
taxed on the deferred amounts (and income 
attributable thereto) when such amounts 
are paid or otherwise made available. 

If an unfunded State or local plan (other 
than an eligible judicial plan) does not qual- 
ify as an eligible plan, the deferral is includ- 
ed in the employee's gross income when 
there is no longer a substantial risk of for- 
feiture of such amount. 




E 


as 

1 


4. Unfunded deferred compensa- 
tion arrangements of State 
and local governments and 
tax-exempt employers (sec. 
1104 of the House bill and sec. 
1207 of the Senate amend- 
ment) 

a. Eligible plan 



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(d) Effective dates. — The basis recovery 
rule applicable to distributions made before 
the annuity starting date applies to 
amounts received after December 31, 1986. 
However, in the case of a plan that, on May 
5, 1986, permitted the withdrawal of em- 
ployee contributions before separation from 
service, distributions are treated as made 
first out of nontaxable employee contribu- 
tions made before December 31, 1986. 

The repeal of the 3-year basis recovery 
rule is fully effective with respect to an 
individual whose annuity starting date is 
after January 1, 1989. If the annuity start- 
ing date is after January 1, 1988, but on or 
before January 1, 1989, 50 percent of the 
basis is recovered under the 3-year rule, and 
the remaining 50 percent would be recov- 
ered under the new basis recovery rule. 


(a) Same as House bill and President's 
proposal. 

(b) Provides an exception to the 5-year 
repayment period only for those loans ap- 
plied to the purchase of the participant's 
principal residence or the principal resi- 
dence of a descendant of the participant. 


c5 

Ol 

3 
O 
X 


(d) Effective dates.— The provisions gen- 
erally apply to distributions made after 
December 31, 1985. However, the basis re- 
covery rule applicable to distributions made 
before the annuity starting date does not 
apply to benefits accrued prior to January 1, 
1986, and such pre-1986 benefits are treated 
as distributed before any post-1985 benefits. 
The repeal of the 3-year basis recovery rule 
does not apply to any individual whose an- 
nuity starting date is on or before July 1, 
1986. 


(a) Same as President's proposal. 

(b) Provides an exception to the 5-year 
repayment period only for those loans ap- 
plied to the purchase of the participant's 
principal residence (whether or not a first- 
time purchase). Requires that a plan loan be 
amortized in level payments, made not less 
frequently than quarterly over the term of 
loans. 


n 

o 

a. 

2 

Cu 

y 
c 

Ol 


(d) Effective dates. — The provisions gener- 
ally would apply to distributions made after 
December 31, 1985. 

In addition, the basis recovery rule appli- 
cable to distributions made before the annu- 
ity starting date would not apply to benefits 
accrued prior to January 1, 1986. The repeal 
of the 3-year basis recovery rule and the 
modification of the exclusion ratio would 
not apply to any amount received as an 
annuity if the annuity was in pay status on 
January 1, 1986. 


(a) Under the proposal, a loan would be 
treated as a distribution to the extent that 
the loan exceeds the lesser of— 

(1) $50,000, reduced by the highest 
outstanding loan balance during the 
prior 12 months, or 

(2) the greater or $10,000 or one-half 
of the employee's accrued benefit. 

(b) The proposal provides an exception to 
the five-year repayment period only for 
those loans applied to the first-time pur- 
chase of the participant's principal resi- 
dence. 


•J 
S 

Ol 

a. 




(a) Subject to certain exceptions, a loan to 
a participant from a qualified plan is treat- 
ed as a taxable distribution of plan benefits. 
An exception is provided to the extent that 
the loan, when added to the outstanding 
balance of all other plan loans, does not 
exceed the lesser of— 

(1) $50,000, or 

(2) the greater of $10,000 or one-half 
the participant's accrued benefit. 

(b) The exception applies only if the loan 
must, by its terms, be repaid within five 
years, or within a reasonable period if the 
loan is used to acquire or improve a person- 
al residence of the participant or family 
member. 


E 

Oj 


•§ 

i 


4. Loans under qualified plans 
(sec. 1134 of the House bill 
and sec. 1233 of the Senate 
amendment) 

a. Amounts treated as distri- 
butions 

b. Repayment period 



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Effective date. — Taxable years beginning 
after 1985. For prior years, the IRS would 
follow the valuation rule, except that the 
assessed valuation of the property for local 
real estate tax purposes would be treated as 
meeting the requirement of a qualified ap- 
praisal. 


A self-employed individual is permitted to 
deduct (for income tax purposes) 50 percent 
of the amounts paid for health insurance 
(but not in excess of net earnings from self- 
employment), unless the health insurance is 
available through other employment of the 
self-employed individual or such individ- 
ual's spouse. 

The deduction is not allowable unless pro- 
vided through a nondiscriminatory health 
plan applicable to all unincorporated trades 
or businesses in which the self-employed 
individual is a 5-percent owner. 

Effective date.— Taxable years beginning 
after December 31, 1986. 


(a) An employer is permitted to take into 
account projected increases in medical costs 
in calculating the amount deductible for 
contributions to a welfare benefit fund for 
post-retirement medical benefits. The 
amount taken into account is limited by 
reference to projected increases in medical 
costs under a specified index. 

(b) Extends the due date of the study 
(mandated in DEFRA) relating to minimum 
standards for welfare benefit plans and a 
review of the funding levels of such plans to 
1 year from the date of enactment of the 
bill. 

Effective date.— Taxable years beginning 
after December 31, 1986. 


41 

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(1) the operating cost paid in furnish- 
ing the lodging, or 

(2) the rent received, in the case of 
such lodging furnished in 1984 or 1985. 


Under present law, a self-employed indi- 
vidual is not permitted to deduct (or ex- 
clude) the cost of health benefits, group- 
term life insurance, or cafeteria plan bene- 
fits for the self-employed individual. 


Under present law, an employer general- 
ly is entitled to deduct contributions (within 
limits) to a welfare benefit fund to provide 
post-retirement medical benefits for em- 
ployees. The limits allow amounts reason- 
ably necessary to accumulate reserves 
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retirement life insurance benefits (includ- 
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medical benefits provided to future retirees 
will have the same cost as medical benefits 
currently provided to retirees. Because the 
reserve is to be computed on the basis of 
current medical costs, future inflation is not 
taken into account. 


E 

4) 




5. Deductibility of health insur- 
ance costs of self employed 
(sec. 1261 of the Senate 
amendment) 


6. Health benefits for retirees 
(sec. 1263 of the Senate 
amendment) 






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(d)(1) Same as House bill, but limits its 
application only to residents of countries 
that impose gross tax on transportation in- 
come of U.S. persons (with anti-conduit 
rules to prevent flag shopping). Residents of 
other countries are taxed as under present 
law and can elect to be taxed on a net basis 
for noneffectively connected income. 

(2) Collects the tax through return filing. 

(3) Retains present law's definition of ef- 
fectively connected income. 

(e) Same as House bill. 

Effective date. — Generally, taxable years 
beginning after 1986. The repeal of the spe- 
cial U.S. sourcing rules for certain leasing 
income does not affect income attributable 
to an asset owned on January 1, 1986, if that 
asset is leased before that date. Provides a 
targeted transitional rule. 


Same as House bill, but sources income 
from the transmission of communications or 
data from the United States to any foreign 
country (or vice-versa) as 50 percent U.S. 
source and 50 percent foreign source. 

Effective date. — Taxable years beginning 
after 1986. 


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(d)(1) Imposes a four-percent gross-basis 
tax on U.S. source transportation income of 
foreign persons, unless prohibited by treaty 
or reciprocal exemption (with anti-conduit 
rules to prevent flag shopping). 

(2) Collects the tax through a withholding 
requirement. 

(3) Transportation income is effectively 
connected only in limited cases. 

(e) Reciprocal exemptions do not apply in 
treaty shopping cases. 

Effective date. — Same as President's pro- 
posal. 


Sources certain offshore income and in- 
come earned in space in the recipient's 
country of residence. Treats U.S. -controlled 
foreign corporations as U.S. residents for 
purposes of this rule. 

Effective date.— Taxable years beginning 
after 1985. 


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(d) Retain present law. 

Effective date. — Generally, taxable years 
beginning after 1985. The repeal of the spe- 
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income would not affect income attributable 
to an asset owned on January 1, 1986, if that 
asset was first leased before that date. 


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(d) The United States (in contrast with a 
number of countries) does not impose a 
gross-basis tax on domestic source shipping 
income of foreign persons. 


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come earned in space (sec. 615 
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Same as President's proposal and House 
bill. 

(2) Same as House bill. 

Effective date.— Generally, taxable years 
beginning after 1986, but only if (and so long 
as) an agreement is in effect between a 
possession and the United States to coordi- 
nate the U.S. and possession tax systems. If 
an implementing agreement is not in place 
within one year after enactment. Treasury 
shall report on the status of negotiations. 
The provision concerning bank of Guam is 
effective for taxable years beginning after 
November 16, 1985. 


(a) Same as House bill. 

Effective date. — Taxable years beginning 
on or after January 1, 1987. 

(b) Same as House bill, and extends tax- 
free allowance treatment to Defense De- 
partment employees in Panama. 

Effective date.— Taxable years beginning 
after 1986. 


3 
O 


Same as President's proposal, and ex- 
tends anti-abuse provisions to individuals 
resident in a possession. 

(2) Provides that interest income on U.S. 
Government obligations held by the Bank of 
Guam is treated as not effectively connected 
with the conduct of a U.S. trade or business. 

Effective date. — Taxable years beginning 
after 1985, but only if (and so long as) an 
agreement is in effect between a possession 
and the United States to coordinate the U.S. 
and possession tax systems. The provision 
concerning Bank of Guam is effective for 
taxable years beginning after November 16, 
1985. 


(a) Clarifies that the Agreement in Imple- 
mentation of the Panama Canal Treaty does 
not exempt U.S. taxpayers from U.S. tax. 

Effective date. — All open taxable years. 

(b) Provides that U.S. government em- 
ployees of the Panama Canal Commission 
may exclude allowances equivalent to those 
permitted to be excluded by State Depart- 
ment employees in Panama. 

Effective date.— Taxable years beginning 
after 1985. 


1 

2 

n 

V 


For American Samoa, Guam, and the 
CNMI, implement anti-abuse provisions to 
prevent the use of corporations in these 
possessions to avoid U.S. tax. Coordinate 
taxes among these possessions and ex- 
change information between each posses- 
sion and the United States. Each possession 
would receive taxes withheld on compensa- 
tion of U.S. Government personnel sta- 
tioned there. 

(2) No provision. 

Effective date. — Generally, January 1, 
1986. The mirror codes of Guam and the 
CNMI would continue to operate until and 
except to the extent that each possession 
took action to amend its own laws. 


(a) None. 

(b) None. 


CS 

c 

to 
a< 


American Samoa has adopted its own in- 
come tax system. American Samoa has cho- 
sen to use the Code, with minor 
amendments, as its internal income tax sys- 
tem. 

(2) Interest income on U.S. obligations 
held by the Bank of Guam is treated as 
effectively connected with the conduct of a 
U.S. trade or business. 


(a) An agreement between the United 
States and Panama entered into in conjunc- 
tion with the Panama Canal Treaty speci- 
fies the rights and legal status of agencies 
and employees of the U.S. Goverment oper- 
ating in Panama. One article of the agree- 
ment provides an exemption from tax for 
U.S. employees of the Panama Canal Com- 
mission. In a diplomatic note, Panama has 
confirmed the United States' explanation 
that the exemption was intended to apply 
solely to Panamanian taxes. Courts have 
split on the question whether the exemption 
applies to U.S. taxes. 

(b) Overseas employees of the U.S. govern- 
ment are permitted to exclude certain al- 
lowances from gross income for U.S. tax 
purposes. Allowances paid to U.S. employ- 
ees of the Panama Canal Commission are 
not presently excludable under this rule. 


E 


b. Guam, the Northern Mari- 
ana Islands, and American 
Samoa (Cont.) 


3. Taxation of U.S. employees of 
Panama Canal Commission 
(sec. 642 of the House bill and 
sec. 942 of the Senate amend- 
ment) 



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(a) Same as President's proposal and 
House bill. 

(b) Imposes no branch tax on interest. 

(c) Imposes tax at lower of 30 percent or 
treaty branch tax rate (or, if none, treaty 
direct investment dividend rate). 

(d) For dividends, retains present law sec- 
ond-level withholding tax (but reduces the 
50-percent income threshold to 10 percent) 
when treaties prohibit imposition of branch 
tax. Retains present law second-level with- 
holding tax on interest but reduces income 
threshold to 10 percent and treats interest 
as U.S. source if it is deducted in the United 
States. 

(e) Same as House bill, except overrides 
treaties in treaty shopping cases with re- 
spect to the second-level withholding taxes 
also. 

(f) In Part C.3., above, expands the cur- 
rent deduction for dividends received from 
foreign corporations. 

Effective date.— Taxable years beginning 
after 1986. 


Same as House bill, and treats the remov- 
al of business assets from U.S. jurisdiction 
as a disposition, with basis step-up for this 
purpose for business assets brought into the 
United States. A foreign person's sale of 
U.S. assets that formerly were used in a 
U.S. business is taxable. 

Effective date.— Taxable years beginning 
after 1986. 


Same as House bill. 

Effective date.— The rule applies to sales 
of property acquired in tax-free exchanges 
after March 1, 1986. 


ca 

3 
O 


(a) Same as President's proposal. 

(b) Same as President's proposal. 

(c) Same as President's proposal. 

(d) In the case of countries with treaties 
that now allow a U.S. withholding tax, but 
not the branch profits tax, retains present 
law; otherwise same as President's proposal. 

(e) Overrides treaties to the extent they 
allow treaty shopping. 

(f) Allows a credit against a U.S. compa- 
ny's U.S. tax for any branch level tax im- 
posed on a foreign corporation owned by the 
U.S. company on receipt of a dividend from 
the foreign corporation. 

Effective date.— Taxable years beginning 
after 1985. 


Provides that income or gain is treated as 
effectively connected with a U.S. trade or 
business if it is attributable to another tax- 
able year and would have been so treated if 
it had been taken into account in that other 
year. 

Effective date.— Taxable years beginning 
after 1985. 


Applies the tax-avoidance expatriate 
rules to gains on the sale of property the 
basis of which was determined by reference 
to property located in the United States, 
stock of a U.S. corporation, or a debt obliga- 
tion of any U.S. person. 

Effective date.— The rule applies to sales 
of property acquired in tax-free exchanges 
after September 25, 1985. 


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to 
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2 

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(a) Impose a tax on remitted profits of 
U.S. branches of foreign corporations. 

(b) Impose a tax on foreign corporations' 
interest payments that are allocable to U.S. 
branch operations. 

(c) Tax would be imposed at a 30-percent 
rate, or at lower treaty rate that would 
apply to direct-investment dividends paid to 
the foreign corporation. 

(d) Repeal the withholding taxes on divi- 
dends and interest paid by foreign corpora- 
tions. 

(e) Tax would not be imposed when exist- 
ing U.S. treaties prohibit a tax on branch 
profits — some argue that a number of exist- 
ing treaties do so. 

Effective date. — Taxable years beginning 
after December 31, 1985. 


(a 

c 
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a) 
3 
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Foreign corporations are subject to U.S. 
corporate-level tax on income effectively 
connected with a U.S. trade or business. A 
shareholder-level tax also is imposed on 
some foreign corporate earnings: a 30-per- 
cent gross withholding tax applies to a pro 
rata portion of dividends paid by a foreign 
corporation if more than 50 percent of the 
corporation's income over a three-year peri- 
od is effectively connected with a U.S. trade 
or business. A similar withholding tax ap- 
plies to interest payments by foreign corpo- 
rations. The withholding taxes are reduced 
or eliminated under a number of U.S. tax 
treaties. Some countries substitute a 
branch-level tax for a direct shareholder- 
level tax on domestic source earnings of 
foreign corporations. 


The United States taxes foreign persons' 
income that is effectively connected with a 
U.S. trade or business on a net basis at 
graduated rates, in the same manner that it 
taxes the income of U.S. persons. Foreign 
persons may not be subject to U.S. tax if 
they receive income that was earned by a 
U.S. trade or business in a year after the 
trade or business has ceased to exist (e.g., by 
selling property and recognizing the gain on 
the installment basis). 


A U.S. citizen who gives up citizenship for 
a principal purpose of avoiding U.S. tax will 
generally continue for a period of ten years 
to be taxed as a citizen on U.S. source 
income, but not foreign source income. U.S. 
source income for this purpose includes 
gains from sales of U.S. property. Tax-avoid- 
ance expatriates may be able to avoid tax by 
making a tax-free exchange of U.S. property 
for foreign property. 


E 

a; 


E. Treatment of Foreign Taxpayers 
1. Branch-level tax (sec. 651 of 
the House bill and sec. 951 of 
the Senate amendment) 


2. Retain character of effectively 
connected income (sec. 652 of 
the House bill and sec. 952 of 
the Senate amendment) 


3. Tax-free exchanges by expa- 
triates (sec. 653 of the House 
bill and sec. 953 of the Senate 
amendment) 






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Importers cannot claim a transfer price 
for income tax purposes that is higher than 
would be consistent with the value they 
claim for customs purposes. 

Effective tfate.— Transactions entered 
into after March 18, 1986. 


Does not allow a U.S. corporation to con- 
solidate with other U.S. corporations if re- 
lated foreign parties benefit from its losses 
through foreign consolidation or group re- 
lief rules, unless the income of those related 
foreign parties is or will be subject to U.S. 
tax. 

Effective date— Taxable years beginning 
after 1986. s s 


Denies the deduction for interest paid or 
accrued to related, tax-exempt parties 
(other than ESOPs) to the extent net inter- 
est exceeds 50 percent of pre-net interest 
deduction taxable income. Provides carry- 
over for disallowed amounts. This restric- 
tion also applies to back-to-back loans that 
might otherwise defeat the purpose of this 
rule. 

Effective date. — Taxable years beginning 
after September 30, 1986. 




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Importers may claim a transfer price for 
customs purposes that is too low to be con- 
sistent with the transfer price they claim 
for income tax purposes. (See Brittingham 
66 T.C. 373; 79-2 USTC 9494). 


U.S. corporations that are "residents" of 
foreign countries may consolidate with prof- 
itable companies both here and abroad and 
obtain for related parties two deductions for 
one item of expense. 


Certain taxpayers may unduly reduce 
their tax by deducting interest paid or 
accrued to related parties who do not pay 
U.S. tax on the interest income. 




E 

Oj 


8. Transfer prices for imports 
(sec. 981 of the Senate amend- 
ment) 


^ 0) 

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10. Interest paid to related tax- 
exempt parties (sec. 984 of the 
Senate amendment) 



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(a) Same as House bill, except for a quali- 
fied business unit the functional currency of 
which is the currency of the economic envi- 
ronrnent in which a significant part of the 
unit's activities are conducted and which is 
used in keeping books and records. 

(b) Same as House bill. 

(c) Same as House bill, with regulatory 
authority to permit election if taxpayer uses 
a method of accounting that approximates a 
separate transactions method. 


Same as President's proposal and House 
bill, with clarification that the Secretary 
may establish procedures for taxpayers 
whose functional currency changes. 


(a) Same as House bill, with addition of 
entering into or acquiring forward con- 
tracts, futures, options, or similar financial 
instruments that are not marked to market 
under section 1256. Also, it is clarified that 
items of gross income or receipts (not net 
income) are taken account of 

(1) Same as House bill. 


3 
O 

a 


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ft 

1 
1 


(a) The functional currency is the U.S. 
dollar, except for a qualified business unit, 
in which case it is the currency used in 
keeping books and records and in which a 
significant part of business activities are 
conducted. 

(b) A qualified business unit's functional 
currency is the U.S. dollar if activities are 
primarily conducted in U.S. dollars. 

(c) A taxpayer may elect to use the U.S. 
dollar as the functional currency of a quali- 
fied business unit if the unit keeps its books 
in U.S. dollars. 


1 

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(a) Acquisition of a debt instrument, be- 
coming an obligor under a debt instrument, 
accruing or otherwise taking into account 
an item of expense or income in a nonfunc- 
tional currency or by reference to the value 
of a nonfunctional currency that is to be 
paid after the date of accrual or taking into 
account. 

(1) The disposition of nonfunctional cur- 
rency generates exchange gain or loss. 


« 

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a. 


u 
CU 

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2 

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The determination of whether exchange 
gain or loss is recognized on a transaction- 
by-transaction basis, or in the aggregate on 
an annual basis, would be determined by 
reference to the economic environment in 
which a business entity operates. 


(a) The functional currency of an entity 
generally would be the primary currency of 
the economic environment in which the en- 
tity operates. 

(b) No provision. 

(c) Taxpayers would always be allowed to 
elect to use the U.S. dollar as the functional 
currency. 


Choice of a functional currency, including 
the election of the U.S. dollar, would be 
treated as a method of accounting that 
could be changed only with consent of the 
Secretary. 


(a) Foreign currency denominated finan- 
cial assets or liabilities. 

(1) No provision. 


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F. Foreign Currency Exchange Gain 
or Loss (sec. 661 of the House bill 
and sec. 961 of the Senate amend- 
ment) 

1. Functional currency concept 


2. Identification of functional 
currency 

a. General rule 

b. Activities primarily con- 
ducted in dollars 

c. Election to use U.S. dollar 


h 

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ii 

e 
.£•£ 

4) c 


4. Foreign currency transactions 

a. Definition of foreign cur- 
rency transactions 

(1) Disposition of non- 
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(b) No provision. 

(c) Same as House bill. 

Effective date.— Bonds issued after date of 
enactment. 


Treats bonds to finance certain land ac- 
quisition and redevelopment in blighted 
areas, and for use by nongovernmental per- 
sons, as tax-exempt IDBs. 

(a) Same as House bill, except 95 percent 
of proceeds are required to be used for rede- 
velopment purposes in a locally designated 
blighted area. 


a; 

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(b) In the case of section 501(c)(3) or- 
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aggregate amount of outstanding bonds 
of which each organization is a benefici- 
ary may not exceed $150 million. (Gen- 
erally, rules of the present $40 million 
limitation on beneficiaries of IDB-fi- 
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(c) All property financed with pro- 
ceeds of these bonds is required to be 
owned by a section 501(c)(3) organiza- 
tion or governmental unit (using Feder- 
al income tax concepts of ownership). 

Effective date. — Bonds issued after De- 
cember 31, 1985. 

Transitional exception for item (c), simi- 
lar to those provided for exempt-facility 
bonds (item l.a., above). 


Treats bonds to finance certain land ac- 
quisition and redevelopment in blighted 
areas, for ultimate use by nongovernmental 
persons, as tax-exempt nonessential function 
bonds. 

(a) Qualified redevelopment bonds must 
be part of an issue: 

(i) All proceeds (other than costs of 
issuance and proceeds deposited in a 
reasonably required reserve fund) of 
which are used for redevelopment pur- 
poses in a locally designated blighted 
area, and 

(ii) With respect to which incremen- 
tal property tax revenues (i.e., addition- 
al tax revenues attributable to 
increased property values by reason of 
bond-financed redevelopment) are re- 
served exclusively for debt service on 
the issue, to the extent necessary to 
cover such debt service. 
Real property taxes in the designated 
area must be imposed at the same rate and 
in the same manner as for similar property 
located elsewhere in the jurisdiction. No 
additional fees or charges may be imposed 
in the designated area that are not imposed 
on other similar property elsewhere in the 
jurisdiction. 




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The grantor trust rules are modified 
to delete the 10-year exception of present 
law (e.g., "Clifford" trusts) and to treat pow- 
ers and interests of the grantor's spouse as 
powers and interests of the grantor (e.g., 
spousal remainder trusts). 


The undistributed income of both existing 
and newly created estates for taxable years 
beginning more than 2 years after the dece- 
dent's death is taxed according to the rates 
applicable to nongrantor trusts (See item 2, 
above). 

The rate for the first two taxable years is 
the rate of a married person filing sepa- 
rately. 




CQ 

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3 
O 


The House bill expressly provides that the 
grantor of a grantor trust will be treated as 
owning the assets of the trust for all pur- 
poses. 

The grantor trust rules are modified so 
that they apply only where there are (1) 
certain administrative powers which permit 
indirect control over the trust assets, (2) a 
power to revoke, or (3) a power to control 
income. 


Under the House bill — 

(a) an estate is treated as a separate 
taxable entity that is required to 
adopt the same taxable year as the 
decedent; 

(b) an estate is taxable at the same 
rates as a single individual, calculated 
without a zero bracket amount but with 
a personal exemption of $600; 

(c) no distribution deductions is al- 
lowed; and 

(d) the executor, with the consent of 
the surviving spouse, is permitted to 
elect to continue the taxable year of the 
decedent after his death as if the dece- 
dent died on the last day of his taxable 
year. 




■« 

to 
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c 

01 
01 

I. 


The President's proposal limits the cir- 
cumstances under which a grantor would be 
treated as the owner of the trust. A grantor 
would be taxed directly on trust income 
only if 

(a) payments of trust property are 
required to be made to, or for the bene- 
fit of the grantor or the grantor's 
spouse; 

(b) payments may be made to or for 
the benefit of the grantor or the grant- 
or's spouse — 

(i) under a discretionary power to 
make payments, or 

(ii) by exercise of a power to re- 
voke or amend the trust, which 
power is in the grantor or the 
grantor's spouse; 

(c) the grantor or the grantor's spouse 
has any power to cause the trustee to 
lend trust income or corpus to either of 
them without adequate security and in- 
terest; or 

(d) the grantor or the grantor's 
spouse has borrowed trust income or 
corpus and has not completely repaid 
the loan or any interest thereon before 
the beginning of the taxable year. 


The President's proposal would — 

(a) provide that an estate would be 
treated as a separate taxable entity; 

(b) require the estate to adopt the 
same taxable year as the decedent; 

(c) subject an estate to tax at a sepa- 
rate rate schedule, with no personal 
exemption and no zero bracket amount, 
but with a deduction for distributions 
to beneficiaries; 

(d) exempt any estate with less than 
$600 of gross income from Federal tax 
liability; and 

(e) continue the taxable year of the 
decedent after his death as if the dece- 
dent died on the last day of his taxable 
year. 




c 

01 


Under certain circumstances, the grantor 
(or other person having the power to revoke 
the trust) is taxed directly on trust income. 

The grantor. — The grantor generally is 
treated as the owner of all or a portion of 
the trust if (1) the grantor has a reversion- 
ary interest expected to return to him with- 
in ten years; (2) the grantor has the power to 
control beneficial enjoyment of the income 
or corpus; (3) the grantor retains certain 
administrative powers; (4) the grantor re- 
tains the right to revoke the trust at any 
time during the first ten years of the trust's 
existence; or (5) the income of the trust may 
be distributed to the grantor or the gran- 
tor's spouse during the first ten years of the 
trust's existence. 

Persons other than the grantor. — A person 
other than the grantor is treated as the 
owner of all or a portion of the trust if (1) 
that person has the power to revoke the 
trust, or (2) that person surrendered the 
power to revoke and that person retained 
one of the powers listed above. 


A decedent's estate is treated as a sepa- 
rate taxable entity, beginning as of the date 
of death. The estate may elect a taxable 
year different than the decedent's taxable 
year. 

Under present law, an estate is allowed a 
$600 personal exemption and otherwise 
computes its tax liability generally in the 
same manner as a nongrantor trust, except 
that the throwback rules do not apply. 




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The reduction in the recapture period to 
10 years enacted in 1981 is extended to 
estates of individuals who died after 1976 
and before 1982. 


Estates of individuals dying before Janu- 
ary 1, 1986, that substantially complied 
with the requirements enumerated on the 
Federal Estate Tax Return (as opposed to 
Treasury regulations) are allowed to perfect 
defective elections within 90 days after 
being notified by IRS. 


Disclaimers of property transferred be- 
fore November 15, 1958, that were made 
before December 9, 1980, are valid for Fed- 
eral gift tax purposes if the requirements of 
the 1958 Treasury regulations (other than 
timing) were satisfied and the disclaimer 
was made within a reasonable time after 
the property vested (rather than was trans- 
ferred, as required by the regulations). (As 
modified by floor amendment by Senators 
Metzenbaum and Chafee, adopted by voice 
vote.) 


Gift or estate tax deductions are permit- 
ted for qualified conservation contributions 
without regard to the income tax conserva- 
tion purpose requirement. 

Effective date.— Transfers after December 
31, 1986. 


ca 

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Real property used in certain farming 
and other closely held business activities 
may be valued at its current use, rather 
than fair market, value for estate tax pur- 
poses. A special recapture tax is imposed if 
the property is disposed of or ceases to be 
used in its qualified use within a 10-year 
recapture period. (In 1981, this recapture 
period was reduced from 15 years, effective 
for estates of individuals dying after Decem- 
ber 31, 1981.) 


Real property used in certain farming 
and other closely held business activities 
may be valued at its current use, rather 
than fair market, value for estate tax pur- 
poses. This provision is available only if 
elected on the first estate tax return filed 
and only if the election, as filed, substantial- 
ly complies with Treasury Department reg- 
ulations. 


A disclaimer is an irrevocable refusal to 
accept property. If a disclaimer complies 
with Federal rules, the disclaimed property 
is not treated as having been transferred by 
the party making the disclaimer for Federal 
gift tax purposes. Disclaimers made after 
1976 are governed by statutory rules; dis- 
claimers made before 1977 are governed by 
Treasury regulations, adopted on November 
15, 1958. (The U.S. Supreme Court upheld 
these regulations in Jewett v. Commissioner, 
455 U.S. 305 (1982).) 


A special exception to the general restric- 
tions on tax deductions for charitable con- 
tributions of partial interests in property 
applies in the case of qualified conservation 
contributions (e.g., easements). To qualify 
for a gift or estate tax deduction, these 
contributions must satisfy the same require- 
ments, including a conservation purpose re- 
quirement, that apply for income tax 
deductions. 


E 

o; 


C. Gift and Estate Taxes 

1. Current use valuation recap- 
ture period for pre-1982 es- 
tates (sec. 1616 of the Senate 
amendment) 


2. Filing estate tax current use 
valuation elections (sec. 1615 
of the Senate amendment) 


3. Gift tax treatment of certain 
disclaimers (sec. 1617 of the 
Senate amendment) 


4. Gift and estate tax deductions 
for certain conservation ease- 
ments (sec. 717 of the Senate 
amendment) 



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Same as House bill. Additionally, pro- 
vides that the $20,000 maximum does not 
apply in cases of intentional disregard. 

Effective date. — Returns due on or after 
January 1, 1987 (without regard to exten- 
sions). 


(a) Same as House bill. 

Effective date. — Amounts assessed after 
December 31, 1986. 

(b) Requires the Treasury to report to the 
Senate Finance and House Ways and Means 
Committees by March 1, 1987, with specific 
recommendations as to how the cost of col- 
lection charge described in the President's 
proposal is proposed to be implemented. 


Ol 

3 
O 

a 


Same as the President's proposal, except 
provides a $100,000 maximum penalty 
($20,000 for supplying incorrect informa- 
tion). 

Effective date. — Returns due on or after 
January 1, 1986 (without regard to exten- 
sions). 


(a) Increases the penalty for failure to pay 
from one-half of one percent to one percent 
per month (up to the 25 percent limit) after 
the taxpayer has been notified that the IRS 
will levy upon the taxpayer's assets to col- 
lect the past-due taxes. This is the point at 
which the IRS uses more expensive collec- 
tion methods. 

Improves the coordination of the penalty 
for failure to pay taxes with the penalty for 
failure to file a tax return. 

Effective date. — Amounts assessed after 
December 31, 1985. 

(b) No provision. 


1 

2 

m 
C 

a; 


(a) Eliminate the $50,000 maximum; and 

(b) Impose a new $5 penalty for supplying 
incorrect information (with a reasonable 
cause exception). 

Effective date. — Returns due on or after 
January 1, 1986 (without regard to exten- 
sions). 


(a) Repeal present-law penalty. 

(b) Replace the penalty for failure to pay 
taxes with a cost of collection charge. The 
goal of the proposal is to recover IRS' costs 
of collecting delinquent payments. 

Effective date. — Returns due on or after 
January 1, 1986 (without regard to exten- 
sions). 


c 


The Code provides a $50 penalty for each 
failure to file an information return with 
the IRS and each failure to supply a copy of 
the information return to the taxpayer. The 
maximum penalty is generally $50,000, ex- 
cept in cases of intentional disregard. 

The Code also provides a $5 penalty ($50 
under certain circumstances) for failure to 
furnish a correct taxpayer identification 
number. There is no specific penalty for 
including other incorrect information on an 
information return. 


(a) A taxpayer who fails to pay taxes 
when due must pay a penalty of one-half of 
one percent of the tax for the first month 
not paid. The penalty increases by one-half 
of one percent for each month the failure to 
pay continues, up to a maximum of 25 per- 
cent. 

(b) No provision. 


E 


A. Penalties 

1. Penalties relating to informa- 
tion returns (sec. 1301 of the 
House bill and sec. 501 of the 
Senate amendment) 


2. Penalty for failure to pay 
taxes (sec. 1302 of the House 
bill and sec. 502 of the Senate 
amendment) 

a. Penalty 

b. Cost of collection charge 



c 

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(a) Applies the negligence penalty only to 
the portion of the underpayment attributa- 
ble to negligence and increases the 5-per- 
cent component of the negligence penalty to 
10 percent. The time-sensitive component is 
not changed. 

(b) Same as House bill. 

(c) Same as House bill. 

(d) Same as House bill. 

Effective date.— Returns required to be 
filed on or after January 1, 1987. 


Increases this penalty from 10 to 20 per- 
cent of the amount of the underpayment of 
tax attributable to the understatement. 

Effective c?ate— Returns due after Decem- 
ber 31, 1986 (without regard to extensions). 


CQ 
a; 

3 

O 
X 


(a) Applies the negligence penalty only to 
the portion of the underpayment not subject 
to the fraud penalty. The time-sensitive 
component is not changed. 

(b) Applies the per se negligence penalty 
to all failures to include on a tax return 
items subjects to information reporting. 

(c) Applies the general negligence penalty 
to all taxes imposed by the Code. 

(d) Applies the fraud penalty only to the 
portion of the underpayment of tax attrib- 
utable to fraud; increases the 50 percent 
component of the fraud penalty to 75 per- 
cent. The time-sensitive component is not 
changed. 

Effective date. — Returns required to be 
filed on or after January 1, 1986. 


§ 

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(a) No provision. 

(b) No provision. 

(c) No provision. 

(d) No provision. 


1 

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0. 


(a) The penalty for negligence has two 
components. The first is a time-sensitive 
component, which is half of the interest due 
from the date the return was required to be 
filed until the date the tax is assessed on the 
portion of the underpayment attributable to 
negligence. The second component is 5 per- 
cent of the entire underpayment of tax. If a 
fraud penalty is imposed, no negligence pen- 
alty is imposed. 

(b) A per se negligence penalty applies to 
failures to include on a tax return interest 
or dividends that were reported to the tax- 
payer on an information report, in the ab- 
sence of clear and convincing evidence that 
there was no negligence. This penalty ap- 
plies only to the portion of the underpay- 
ment attributable to the failure to report. 

(c) The general negligence penalty does 
not apply to all taxes imposed by the Code. 

(d) The penalty for fraud has two compo- 
nents. The first is a time-sensitive compo- 
nent, which is half of the interest due from 
the date the return was required to be filed 
until the date the tax is assessed on the 
portion of the underpayment attributable to 
fraud. The second component is 50 percent 
of the entire underpayment of tax. 


If a taxpayer substantially understates 
income tax for any taxable year, the taxpay- 
er must pay a penalty equal to 10 percent of 
the underpayment of tax attributable to the 
understatement. An understatement is sub- 
stantial if it exceeds the greater of 10 per- 
cent of the tax required to be shown on the 
tax return or $5,000 ($10,000 for most corpo- 
rations). This penalty does not apply to 
items for which there was substantial au- 
thority for the position taken by the taxpay- 
er or to items with respect to which the 
taxpayer made adequate disclosure on his 
tax return (with special rules for tax shel- 
ters). 


£ 

01 


3. Negligence and fraud penal- 
ties (sec. 1303 of the House bill 
and sec. 503 of the Senate 
amendment) 


4. Penalty for substantial under- 
statement of tax liability (sec. 
504 of the Senate amendment) 



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V 


Real estate transactions must be reported 
by the first person on the following list (or, 
if no such person is involved in the transac- 
tion, the next person on the list involved in 
the transaction): 

(a) the title company, 

(b) the mortgage lender, 

(c) the settlement attorney or other per- 
son responsible for closing the transaction, 

(d) the seller's broker, 

(e) the buyer's broker, or 

(f) any other person designated in 
Treasury regulations. 

(Floor amendment by Senator Humphrey 
reordering the list of persons required to 
report, adopted by voice vote.) 

Effective date. — Real estate transactions 
occurring on or after January 1, 1987. 


Same as House bill. 

Effective date.— Contracts signed on or 
after or in effect on or after January 1, 1987. 


3 
O 

'> 
o 

ft 

o 

2 


Requires information reporting statutori- 
ly for royalty payments exceeding $10 per 
payee, parallel to information reporting on 
interest. 

Effective date.— Payments made after De- 
cember 31, 1986. 




CO 

3 
O 
K 


Real estate transactions must be report- 
ed. The reporting is to be done by the settle- 
ment attorney or other stakeholder. This 
generally would be the person responsible 
for closing the transaction. 

Effective date.— Real estate transactions 
occurring on or after January 1, 1986. 


Requires Federal executive agencies to 
file an information return on each person 
with which the agency enters into a con- 
tract, listing the person's name, address, 
taxpayer identification number, and any 
other information required by Treasury. 

Effective date.— Contracts signed on or 
after or in effect on or after January 1,1986. 


Any State or local government that im- 
poses an income tax, a real property tax, or 
a personal property tax, must report to the 
individual who paid those taxes and to the 
IRS the amount of those taxes paid by that 
individual. 

Effective date.— January 1, 1987. 


d 
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1 
ft 
o 




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1 

£ 

c 

a; 

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k. 


No provision. 


3 

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1 

ft 
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2 


d 
o 

1 

1 


No provision. 




ca 

.J 

c 

0> 
01 

u 
Cu 


Brokers must, when required by Treasury 
regulations, file information reports on the 
business they transact for customers (sec. 
6045). To date, the IRS has issued regula- 
tions requiring reporting only of gross pro- 
ceeds of sales of securities, commodities, 
regulated futures contracts, and precious 
metals. Reporting on real estate transac- 
tions is not currently required under these 
regulations. Failure to file a required infor- 
mation report is generally subject to a $50 
penalty per failure, up to a maximum of 
$50,000. 


There is no provision that requires infor- 
mation reporting on persons receiving Fed- 
eral contracts. 


No provision requires State and local gov- 
ernments to provide information reports to 
the IRS and the taxpayer on payments of 
State and local income, real property, and 
personal property taxes. 


Information reporting on royalty pay- 
ments exceeding $600 per payee is required 
by Treasury regulations, issued under gen- 
eral statutory authority. Information re- 
porting on interest begins at $10 per payee, 
under specific statutory authority. 




E 

0< 


C. Information Reporting Provisions 

1. Information reporting on real 

estate transactions (sec. 1341 

of the House bill and sec. 521 

of the Senate amendment) 


2. Information reporting on per- 
sons receiving contracts from 
certain Federal agencies (sec. 
1342 of the House bill and sec. 
522 of the Senate amendment) 


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3 
41 

m 


A taxpayer claiming a dependent who is 
at least 5 years old must report the tax- 
payer identification number of that depend- 
ent on that tax return. 

(Floor amendment by Senator Evans, 
adopted by voice vote.) 

Effective date. — Returns due on or after 
January 1, 1987 (without regard to exten- 
sions). 


3 
o 
'to 

1 

u 
a 
o 


Permits the following enclosures: 

(a) a check, 

(b) a letter explaining why no check 
is enclosed, or 

(c) a statement of the taxpayer's ac- 
count. 

The envelope and each enclosure must 
state "Important Tax Return Document En- 
closed." 

Effective date. — Information returns re- 
quired to be filed after December 31, 1986. 


CO 

3 

o 

a: 


i 

'> 
O 

a 
o 


Any person required to file a tax return 
must report on that return the amount of 
tax-exempt interest received or accrued 
during the taxable year. 

Effective date. — Taxable years beginning 
after December 31, 1985. 


1 

1 

Sh 

a 
o 
2 


"3 

o 
a 

£ 

a. 

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01 

a. 


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2 
a 
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1 

a 
o 


3 

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a 
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2 


CS 

3 
4J 

4; 

a. 


There is no requirement that a taxpayer 
claiming a dependent on a tax return report 
the taxpayer identification number (gener- 
ally, the social security number) of that 
dependent on that tax return. 


There is no requirement that all taxpay- 
ers report the amount of tax-exempt inter- 
est they receive on their tax returns. The 
individual income tax return (Form 1040) 
for 1985 does, however, require that taxpay- 
ers with taxable social security benefits re- 
port the tax-exempt interest they receive. 


Information reports on interest, divi- 
dends, and patronage dividends must be 
supplied to the taxpayer either in person or 
in a separate, first-class mailing. Generally, 
nothing else may be enclosed in the enve- 
lope. 


E 

4j 


5. Taxpayer identification num- 
bers of dependents required to 
be shown on tax returns (sec. 
566 of the Senate amendment) 


6. Tax-exempt interest required 
to be shown on tax returns 
(sec. 1343 of the House bill) 


7. Modification of separate mail- 
ing requirement (sees. 501(c) 
(2), (3), and (5), and 523 of the 
Senate amendment) 



c 

V 

S 

e 

a; 

s 

« 

c 

CO 


Requires taxpayers who claim on tax re- 
turns cumulative net losses (plus three 
times the value of cumulative tax credits) 
that exceed cumulative actual cash invested 
in a tax shelter to pay a user's fee of 1 
percent of the losses claimed and 3 percent 
of the credits claimed. (These percentages 
are set at a level that will raise revenue 
approximately equal to the IRS cost of ad- 
ministering the law with respect to tax shel- 
ters.) 

"Tax shelter" is defined as: 

(a) any enterprise required to register 
with a Federal or State securities agen- 
cy (other than a C corporation), 

(b) any syndicate more than 35 per- 
cent of the losses of which are allocable 
to limited partners or limited entrepre- 
neurs, or 

(c) any plan or entity the principal 
purpose of which is to avoid or evade 
Federal income taxes. 

(These definitions are currently used 
in the Code to determine when tax shel- 
ters may deduct items.) 

This user fee is non-deductible. Addition- 
ally, a penalty equal to the user fee is 
imposed if the taxpayer does not pay the 
user fee with the tax return. 

Effective date.— Returns filed on or after 
January 1, 1987. 


Multiply the value of the credits by 300 
percent, instead of 200 percent (to conform 
to individual tax rate changes). 

Effective date.— Same as individual tax 
rate changes. 


s 
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The cost of administering the tax law 
with respect to tax shelters is paid as part of 
the overall IRS budget, which is funded 
from general revenues. This cost is approxi- 
mately $165 million annually, and includes 
audits, examination, appeals, litigation, and 
criminal investigation. No specific fee is 
imposed on tax shelters to offset this cost. 


Tax shelter organizers are required to 
register with the IRS tax shelters they orga- 
nize, develop, or sell. A tax shelter is any 
investment for which the ratio of the deduc- 
tions plus 200 percent of the credits to the 
cash actually invested is projected to be 
greater than 2 to 1. The investment also 
must be subject to Federal or State securi- 
ties requirements or be privately placed 
with 5 or more investors. 


E 

01 


D. Tax Shelter Administration 

1. Tax shelter user fee (sec. 531 
of the Senate amendment) 


.2 s 
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11 

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£§ 

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c 
£ 

c 

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Increases the penalty to the greater of one 
percent of the aggregate amount invested in 
the tax shelter or $10,000. 

Effective date. — Date of enactment. 


Increases the penalty to $250. 

Effective date— Returns filed after date 
of enactment. 


Increases the penalty to $100 per name 
omitted, up to a maximum of $100,000 per 
year. 

Effective date. — Date of enactment. 


Increases the rate to 200 percent of the 
otherwise applicable rate. 

Effective date. — Interest accruing after 
December 31, 1986. 


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0. 


Specified tax shelters are required to reg- 
ister with the IRS and obtain a tax shelter 
identification number. The penalty for fail- 
ure to register a tax shelter with the IRS is 
$10,000 or, if less, one percent of the aggre- 
gate amount invested in the tax shelter (but 
in no event less than $500). 


If a taxpayer invests in a tax shelter that 
has a tax shelter identification number, the 
taxpayer is required to include that number 
on the tax return. The penalty for failure to 
do so is $50, unless the failure is due to 
reasonable cause. 


Organizers and sellers of specified tax 
, shelters are required to maintain lists of 
investors. The penalty for failure to do so is 
$50 for each name missing from the list, 
unless the failure is due to reasonable 
cause, up to a maximum of $50,000 per year. 


If a taxpayer owes interest due to a sub- 
stantial underpayment of tax (more than 
$1,000) attributable to a tax-motivated 
transaction (such as a tax shelter), interest 
is computed at 120 percent of the generally 
applicable rate. 


£ 


3. Penalty for failure to register 
a tax shelter (sec. 533 of the 
Senate amendment) 


4. Penalty for failure to report 
the tax shelter identification 
number (sec. 534 of the Senate 
amendment) 


5. Penalty for failure to main- 
tain lists of investors (sec. 535 
of the Senate amendment) 


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(4) The $25,000 cap is eliminated (as 
under present law, recoverable costs 
would not include costs of the administra- 
tive process); and 

(5) In lieu of the cap, limits are imposed 
on hourly charges by attorneys and ex- 
pert witness fees recoverable under the 
provision. 

Effective date. — Actions commencing 
after December 31, 1985. However, no pay- 
ments may be made as a result of this 
provision before October 1, 1986. 

(b) Same as House bill. 

(c) No provision. 

(d) No provision. 


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(b) Authorizes funding of attorneys' fee 
awards out of source used in non-tax cases. 

Effective date. — Actions commenced after 
February 28, 1983. 

(c) Gives courts the authority to assess all 
or a portion of an attorneys' fee award 
against an IRS employee if the proceeding 
results from an arbitrary or capricious ac- 
tion of the employee. 

Effective date. — Actions commencing 
after December 31, 1985, and before Janu- 
ary 1, 1990. 

(d) Requires an annual report from Treas- 
ury to Congress on attorneys' fees awards. 

Effective date. — Reports required for 1985 
through 1989. 


Authorizes the Tax Court to impose a 
$120 penalty if the taxpayer has not used 
reasonable efforts to resolve his case admin- 
istratively before going to court. 

Effective date. — Cases filed in the Tax 
Court after January 1, 1987. 


Requires the Tax Court and IRS to report 
to Congress annually on Tax Court invento- 
ry and measures taken to close cases more 
efficiently. 

Effective date.— Reports required annual- 
ly beginning after 1985. 




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(b) No provision. 

(c) No provision. 

(d) No provision. 


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(b) On the basis of advise from GAO, no 
amounts have been disbursed to pay Tax 
Court awards of attorneys' fees. 

(c) There is no authority for a court to 
assess all or a portion of an attorneys' fee 
award against an IRS employee. 

(d) There is no requirement that Treasury 
report to Congress annually on attorneys' 
fees awards. 


A taxpayer may go directly to Tax Court 
without requesting review by the adminis- 
trative appeals office within the IRS. After 
the case is opened in the Tax Court, it is 
sent to the IRS appeals office for settlement. 
Many of these cases are then settled with- 
out significant involvement by the Court. 


No provision requires an annual report 
from the Tax Court and the IRS on the Tax 
Court inventory. 




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2. Exhaustion of administrative 
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Court inventory (sec. 1316(d) 
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Same as House bill. 

Effective date. — Payments made after De- 
cember 31, 1986. 


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Same as House bill. 

Effective date. — January 1, 1985. 


Any city with a population in excess of 2 
million that imposes an income or wage tax 
may, if the Secretary so provides, receive 
returns and return information for the 
same purposes and with the same safe- 
guards as are required of a State under 
present law. 

Effective date. — Date of enactment. 


Applies the Regulatory Flexibility Act to 
all rules and regulations prescribed by the 
Treasury. 

(Floor amendment by Senator Sasser, 
adopted by voice vote.) 

Effective date. — Date of enactment. 


OJ 

3 
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Military service-connected disability pay- 
ments are exempt from levy. 

Effective date. — Payments made after De- 
cember 31, 1985. 


The IRS may administratively sell up to 
$100,000 of personal property used in viola- 
tion of the Internal Revenue laws. Such sale 
would require both an appraisal to deter- 
mine value and notice to potential claim- 
ants. Potential claimants can require a 
court proceeding by posting a $2,500 bond. 

Effective date. — January 1, 1986. 


Use of an automobile by a special agent of 
the IRS is treated in the same manner as 
use of an automobile by an officer of any 
other law enforcement agency. 

Effective date. — Date of enactment. 


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Various payments, such as unemploy- 
ment benefits, workmen's compensation, 
and a minimum amount of ordinary wages, 
are exempt from IRS levy. Military service- 
connected disability payments are not, how- 
ever, exempt from levy. 


The IRS can seize property that is used in 
violating the provisions of the Internal Rev- 
enue laws. If the amount of personal proper- 
ty seized is valued at $2,500 or less, the IRS 
may use administrative procedures to for- 
feit the property and sell it without judicial 
action, after both appraisal and notice to 
potential claimants. 


In general, law enforcement officers are 
not subject to the substantiation rules and 
the income and wage inclusion rules for 
specified use of a law enforcement vehicle. 
IRS special agents are not, however, included 
within the term "law enforcement officers." 


Disclosure of returns and return informa- 
tion can be made to States for tax adminis- 
tration purposes provided that safeguards 
against disclosure are ensured. Disclosure 
to cities is not permitted. 


The Regulatory Flexibility Act requires 
that an analysis of the impact of rules and 
regulations (other than interpretative regu- 
lations) on small businesses be performed. 
Treasury's position is that most IRS rules 
and regulations are interpretative. 

1 


E 

a; 


5. Exemption from levy for serv- 
ice-connected disability pay- 
ments (sec. 1324 of the House 
bill and sec. 554 of the Senate 
amendment) 


6. Modification of administra- 
tive rules applicable to forfeit- 
ure (sec. 1325 of the House 
bill) 


7. Certain recordkeeping re- 
quirements (sec. 1326 of the 
House bill and sec. 555 of the 
Senate amendment) 


8. Disclosure of returns and re- 
turn information to certain 
cities (sec. 557 of the Senate 
amendment) 


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The section 513(d) UBIT exemption is ex- 
panded to cover (1) qualified trade shows or 
conventions at which suppliers to the spon- 
soring organization's members sell products 
or services, and (2) qualified trade show and 
convention activities of charitable organiza- 
tions (sec. 501(c)(3)) and social welfare orga- 
nizations (sec. 501(c)(4)). (Floor amendment 
by Sen. Matsunaga, adopted by voice vote.) 

Effective date. — Qualified trade show or 
convention activities conducted in taxable 
years beginning after the date of enact- 
ment. 


CQ 

41 

3 
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The bill provides an exemption from the 
UBIT, in the case of certain tax-exempt 
organizations eligible to receive charitable 
contributions, for income from exhanges or 
rentals of membership or donor mailing 
lists with or to other such organizations. 

Effective date. — Exchanges and rentals of 
lists after the date of enactment. 


The bill codifies the regulation providing 
an exemption from the UBIT, in the case of 
certain tax-exempt organizations eligible to 
receive charitable contributions, for income 
from certain distributions of low-cost arti- 
cles incidental to soliciting charitable con- 
tributions. The bill also defines "low cost 
articles" as any article with a cost not in 
excess of $5 (indexed for inflation). 

Effective date. — Distributions of low cost 
articles after the date of enactment. 


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Charitable and other tax-exempt organi- 
zations are subject to a tax on income from 
an unrelated trade or business (the UBIT), 
i.e., where the conduct of the business is not 
substantially related to the exempt func- 
tions of the organization. 

The U.S. Court of Claims has held that 
income received by the Disabled American 
Veterans from other exempt organizations 
and commercial businesses for the use of its 
mailing lists is subject to the UBIT. 


Charitable and other tax-exempt organi- 
zations are subject to a tax on income from 
an unrelated trade or business (the UBIT), 
i.e., where the conduct of the business is not 
substantially related to the exempt func- 
tions of the organization. 

Under Treasury regulations, the UBIT 
does not apply where an organization 
"sends out low cost items incidental to the 
solicitation of charitable contributions." 
The regulations do not provide a definition 
of "low cost articles." 


Charitable and other tax-exempt organi- 
zations are subject to a tax on income from 
an unrelated trade or business (the UBIT), 
i.e., where the conduct of the business is not 
substantially related to the exempt func- 
tions of the organization. 

An exemption from the UBIT is provided 
for income derived by trade associations 
(sec. 501(c)(6)) or labor unions (sec. 501(c)(5)) 
from qualified trade show and convention 
activities at which members of the sponsor- 
ing organization sell products or services 
(sec. 513(d)). 


E 

4J 


A. Exchanges and Rentals of Mem- 
bership Lists of Certain Tax-Ex- 
empt Organizations (sec. 1404 of 
the House bill and sec. 1702 of the 
Senate amendment) 


B. Distribution of Low-Cost Articles 
by Charities (sec. 1404 of the 
House bill) 


C. Expansion of UBIT Exemption 
for Certain Trade Show Income 
(sec. 1715 of the Senate amend- 
ment) 



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The otherwise applicable distributable 
amount for the James Graham Brown 
Foundation is reduced by certain costs paid 
or incurred by the Foundation for removal 
or remedial action with respect to a hazard- 
ous substance released at a facility owned or 
operated by the Foundation. (Floor amend- 
ment by Sens. McConnell and Ford, adopted 
by voice vote.) 

Effective date. — Taxable years beginning 
after December 31, 1982. 


Membership organizations engaged pri- 
marily in the gathering and distribution of 
news to their members for publication are 
permitted to deduct expenses relating to the 
furnishing of goods and services to members 
from income whether or not derived from 
members. (Floor amendment by Sen. Moy- 
nihan, adopted by voice vote.) 

Effective date. — Date of enactment. 


An organization that transfers technology 
from universities and scientific research or- 
ganizations to the private sector is treated 
as a tax-exempt charitable organization if it 
meets certain requirements, including that 
it was incorporated on July 20, 1981. The 
intended beneficiary of this provision is the 
Washington Research Foundation. (Floor 
amendment by Sen. Gorton, adopted by 
voice vote.) 

Effective date. — Date of enactment. 


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To avoid penalty excise taxes, a private 
nonoperating foundation annually must 
make expenditures or grants for charitable 
purposes in an amount (the "distributable 
amount") equal to five percent of the fair 
market value of its investment assets (sec. 
4942). 


A membership organization generally 
may deduct expenses relating to the fur- 
nishing of goods or services to members only 
from income derived from members or from 
transactions with members (sec. 277). This 
rule does not apply to certain financial in- 
stitutions, insurance companies, securities 
or commodities exchanges, or certain other 
organizations. 


In November, 1985, the U.S. Tax Court 
denied tax-exempt status under section 
501(c)(3) to the Washington Research Foun- 
dation, a nonprofit organization formed to 
assist the transfer of technology from uni- 
versities and tax-exempt research institu- 
tions to the private sector. The Tax Court 
held that the organization was not exclu- 
sively operated for charitable purposes be- 
cause its major activity of providing 
patenting and licensing services was com- 
mercial in nature. 


E 


F. Reduction of Private Foundation 
Payout Requirement by Certain 
Costs of Hazardous Waste Remov- 
al (sec. 1712 of the Senate amend- 
ment) 


G. Exception to Membership Organi- 
zation Deduction Rules (sec. 1710 
of the Senate amendment) 


H. Tax-Exempt Status for Technolo- 
gy Transfer Organization (Sec. 
of the Senate amendment) 



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Same as House bill, except that (1) the 
credit is extended for three years (together 
with authorization for administrative and 
publicity expenses), (2) a 50 percent credit is 
retained for first-year wages, and (3) the 
credit is not available for individuals who 
work for less than 90 days (14 days in the 
case of qualified summer youth employees) 
or 120 hours (20 hours in the case of quali- 
fied summer youth employees). 

Effective date. — Applies for individuals 
beginning work for the employer after 1985 
and before 1989. 


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The targeted jobs credit is extended for 
two additional years with several modifica- 
tions: the credit for second-year wages is 
eliminated, the first-year credit is reduced 
to 40 percent of the first $6,000 of qualified 
first-year wages (except in the case of disad- 
vantaged youth employees), the credit for 
wages paid to an individual who works for 
the employer for fewer than 14 days is 
eliminated, and the authorization for appro- 
priations for administrative and publicity 
expenses is extended through fiscal year 
1987. 

Effective date. — Applies for individuals 
beginning work for the employer after 1985 
and before 1988. 


(1) Excise tax.— A 10-percent excise tax is 
imposed on amounts paid for U.S. television 
and radio broadcast rights for Olympic 
games. 

Effective date. — Amounts paid after No- 
vember 22, 1985, other than pursuant to 
binding contracts in effect on that date. 
Any inconsistent U.S. treaty provision is 
overriden. 

(2) Olympic Trust Fund.— An Olympic 
Trust Fund is established in the Treasury to 
receive amounts from the new excise tax. 
Trust fund monies, less related Treasury 
administrative expenses are available to be 
paid to the U.S. Olympic Committee for 
Olympic-related expenses. 

Effective date. — Date of enactment. 


The diesel fuel excise tax for highway 
vehicles may be imposed on the sale from 
the wholesaler to the retailer of the fuel (or 
by the manufacturer where the sale is di- 
rect to the retailer), at the election of a 
"qualified retailer." 

Effective date.— Sales of diesel fuel (for 
use in highway vehicles) after the first cal- 
endar quarter beginning more than 60 days 
after date of enactment. 


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A tax credit is available on an elective 
basis to employers of individuals from nine 
targeted groups, i.e., individuals who are 
recipients of payments under means-tested 
transfer programs, economically disadvan- 
taged (as measured by family income), or 
disabled. The credit generally equals 50 per- 
cent of the first $6,000 of qualified first year 
wages and 25 percent of the first $6,000 of 
qualified second year wages. A credit equal 
to 85 percent of up to $3,000 of wages of any 
disadvantaged summer youth employee also 
is allowed. The employer's deduction for 
wages must be reduced by the amount of the 
credit. 

Under present law, the credit does not 
apply with respect to targeted-group indi- 
viduals who begin work for the employer 
after December 31, 1985. 


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An excise tax of 15 cents per gallon is 
imposed on the sale of diesel fuel for use in a 
diesel-powered highway vehicle. This tax is 
collected at the retail level. 

The excise tax on gasoline (9 cents per 
gallon) is imposed and collected at the man- 
ufacturer's level. Collection of this tax may 
be deferred to the last sale before retail, 
however, if all parties are registered with 
the IRS. 


£ 


A. Targeted Jobs Tax Credit (sec. 282 
of the House bill and sec. 1708 of 
the Senate amendment) 


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C. Collection of Diesel Fuel Excise 
Tax (sec. 1351 of the House bill 
and sec. 571 of the Senate amend- 
ment) 



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The quarterly payroll threshold at which 
agricultural wages are covered under FUTA 
is increased from $20,000 to $40,000. (See, 
also IV.A.9) 

Effective date. — Wages paid after Septem- 
ber 30, 1986. 


FUTA taxes assessed against certain Indi- 
an tribes for the period of time they are 
refused unemployment compensation cover- 
age by the State are excused. (Floor amend- 
ment by Sen. Armstrong, adopted by voice 
vote.) 

Effective date. — Services performed be- 
fore, on, or after the date of enactment, and 
before January 1, 1988. 


Section 530 of the Revenue Act of 1978 
does not apply to services provided pursuant 
to an arrangement between the taxpayer 
and another organization whereby the indi- 
vidual provided services as an engineer, de- 
signer, drafter, computer programmer, 
systems analyst, or other similarly skilled 
worker engaged in a similar line of work for 
such other organization. (Floor amendment 
by Sen. Packwood on behalf of Sen. Moyni- 
han, adopted by voice vote.) 

Efffective date.— Services rendered after 
the date of enactment. 


Increases from $3,000 to $5,000 the 
amount of undeposited payroll taxes an em- 
ployer may aggregate before the one-eighth- 
monthly deposit rule becomes effective. 

Effective date— Months beginning after 
December 31, 1986. 


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FUTA tax applies to wages of workers in 
agricultural operations with a payroll of at 
least $20,000 in any calendar quarter, or 
with 10 or more employees in 20 weeks of 
the year. 


Generally.Indian tribes are treated as any 
other employer and are subject to Federal 
unemployment tax (FUTA). No exception is 
provided if unemployment compensation 
coverage is denied by the State in which the 
Indian tribes have been denied unemploy- 
ment compensation coverage by the State of 
Colorado and are not required to pay State 
unemployment compensation taxes. 


Section 530 of the Revenue Act of 1978, as 
amended, provides that taxpayers who had 
in the past a reasonable basis (such as past 
industry practice) for not treating workers 
as employees could continue such treat- 
ment, under certain circumstances, without 
incurring employment tax liabilities. 


Unless the Code specifies the mode or 
time for collecting a tax, it is to be collected 
as provided in Treasury regulations. The 
Code does not specify the mode or time for 
collecting (a) income taxes withheld from 
employees or (b) the employee or employer 
FICA taxes. Consequently, the mode and 
time for collecting these taxes is specified in 
Treasury regulations. 

Under these regulations, if the aggregate 
amount of undeposited taxes reaches $3,000 
or more at the end of any one-eighth-month- 
ly period, the employer must deposit the 
taxes within three banking days of the close 
of the one-eighth-monthly period. 


E 

a^ 


3. Agricultural wages subject to 
FUTA (sec. 707 of the Senate 
amendment) 


4. FUTA for certain Indian 
tribes (sec. 1884A of the Sen- 
ate amendment) 


5. Treatment of certain technical 
personnel (sec. 1717 of the 
Senate amendment) 


6. Payroll tax deposits (sec. 636 
of the Senate amendment) 



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During the period of the trust, income 
derived directly from the sale of reindeer or 
reindeer products as provided in the 1937 
Act is exempt from Federal income tax- 
ation. (Floor amendment by Sen. Stevens, 
adopted by voice vote.) 

Effective date.— Applies as if originally 
included in the related provision of the 1937 
Act. 


It is the sense of the Senate that the 
conference report on H.R. 3838 contain the 
name of any business concern or group re- 
ceiving special or unique treatment, and the 
reason for and cost of such treatment. (Floor 
amendment by Sen. Metzenbaum, adopted 
by voice vote.) 


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The present-law exclusion is modified to 
eliminate the requirement of detailed rec- 
ordkeeping. 

Effective date.— Taxable years beginning 
after 1985. 


The bill reinstates and makes permanent 
the expired provisions relating to Vietnam 
MIAs, effective for taxable years beginning 
after 1982. 

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A foster parent may exclude from gross 
income certain reimbursements for ex- 
penses of caring for a foster child placed in 
the home by a government agency or a 
State-licensed, tax-exempt child placement 
agency. To obtain the exclusion, the foster 
parents must account for all expenses in- 
curred for each foster child in their care. 


Certain tax relief provisions applicable 
with respect to Vietnam MIAs and their 
spouses expired after 1982 (sees. 2(a)(3)(B), 
692(b), 6013(f)(1), and 7508(b)). 


Under the Reindeer Industry Act of 1937, 
the United States Government purchased 
all reindeer herds and improvements held 
by non-Alaskan natives. Since then, this 
property has been held in trust by the gov- 
ernment for Alaskan natives who manage 
the reindeer herds. The Court of Appeals for 
the Ninth Circuit ruled in 1985 that rein- 
deer-related income derived by Alaskan na- 
tives from herds is not exempt from Federal 
taxation absent a clear expression of such 
intent in the 1937 Act. 


There is no requirement that conference 
reports on tax legislation are to contain the 
name of taxpayers receiving special or 
unique treatment. 




G. Miscellaneous Provisions 

1. Foster care payments (sec. 
1401 of the House bill) 


2. Rules for spouses of Vietnam 
MIAs (sec. 1402 of the House 
bill and sec. 1701 of the Senate 
amendment) 


3. Exempt certain reindeer in- 
come from tax (sec. 1716 of 
the Senate amendment) 


4. Information on special or 
unique treatment under tax 
bill (sec. 1711 of the Senate 
amendment) 



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